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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 September 30, 2007.
 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
    
    8,431,913
  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  September 30, 2007,
December 31, 2006 and September 30, 2006
    
    
    4Consolidated Statements of Income  For the Three
and Nine Months Ended September 30, 2007 and 2006
    
    
    5Consolidated Statements of Comprehensive Income   For
the Three and Nine Months Ended September 30, 2007 and 2006
    
    
    6Consolidated Statements of Cash Flows  For the
Three and Nine Months Ended September 30, 2007 and 2006
    
    
    7Notes to Consolidated Financial Statements
    
    
    9-18Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations, Liquidity and Capital
    
    
    19-36Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    37-39Item 4. Controls and Procedures
    
    
    40Part II. Other Information:Pursuant to SEC rules and regulations, the following item(s) are
included with the Form 10-Q Report:Item 6. Exhibits and Reports on Form 8-K
    
    
    41Pursuant 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
    
    
    42Section 302 CEO CertificationSection 302 CFO CertificationSection 906 CEO CertificationSection 906 CFO Certification
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS (unaudited)
 (Dollars, in thousands)
    
    09/30/07
    
    
    12/31/06
    
    
    09/30/06ASSETSCash and cash equivalentsCash and due from banks
    
    $
    14,929
    
    
    $
    5,824
    
    
    $
    8,975Federal funds sold
    
    
    7,031
    
    
    
    64,198
    
    
    
    9,093Interest bearing deposits with banks
    
    
    100
    
    
    
    8
    
    
    
    52Total cash and cash equivalents
    
    
    22,060
    
    
    
    70,030
    
    
    
    18,120Mortgage loans held for sale
    
    
    384
    
    
    
    1,823
    
    
    
    1,096Securities, available for sale
    
    
    10,640
    
    
    
    5,878
    
    
    
    5,837Federal Home Loan Bank stock
    
    
    1,927
    
    
    
    1,288
    
    
    
    1,290LoansLoans
    
    
    945,622
    
    
    
    756,420
    
    
    
    741,030Allowance for loan losses
    
    
    (10,309
    )
    
    
    (7,775
    )
    
    
    (7,615
    )Net loans
    
    
    935,313
    
    
    
    748,645
    
    
    
    733,415Premises and equipment, net
    
    
    23,043
    
    
    
    14,293
    
    
    
    14,173Real estate owned
    
    
    3,338
    
    
    
    52
    
    
    
    52Goodwill
    
    
    34,028
    
    
    
    5,473
    
    
    
    5,473Other intangible assets
    
    
    11,551
    
    
    
    2,041
    
    
    
    2,103Accrued interest receivable
    
    
    4,258
    
    
    
    3,337
    
    
    
    2,868Other assets
    
    
    5,416
    
    
    
    3,071
    
    
    
    3,372Total assets
    
    $
    1,051,958
    
    
    $
    855,931
    
    
    $
    787,799LIABILITIESDepositsNon-interest bearing deposits
    
    $
    92,770
    
    
    $
    53,065
    
    
    $
    54,292Interest bearing deposits
    
    
    768,764
    
    
    
    580,151
    
    
    
    596,819Total deposits
    
    
    861,534
    
    
    
    633,216
    
    
    
    651,111Other liabilitiesFederal funds purchased
    
    
    
    
    
    
    37,300
    
    
    
    10,200Securities sold under agreements to repurchase
    
    
    491
    
    
    
    619
    
    
    
    631Federal Home Loan Bank advances
    
    
    36,429
    
    
    
    25,561
    
    
    
    25,561Other liabilities
    
    
    619
    
    
    
    516
    
    
    
    421Accrued interest payable
    
    
    3,361
    
    
    
    3,734
    
    
    
    2,508Subordinated debentures
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000Total liabilities
    
    
    912,434
    
    
    
    710,946
    
    
    
    700,432STOCKHOLDERS EQUITYCommon stock - 20,000,000 shares authorized,
8,471,913 shares at 09/30/07, 8,975,085
shares at
12/31/06; and 5,617,565 shares at 09/30/06
    
    
    137,837
    
    
    
    144,907
    
    
    
    85,353Retained earnings
    
    
    1,675
    
    
    
    84
    
    
    
    2,025Accumulated other comprehensive income (loss)
    
    
    12
    
    
    
    (6
    )
    
    
    (11
    )Total stockholders equity
    
    
    139,524
    
    
    
    144,985
    
    
    
    87,367Total liabilities and stockholders equity
    
    $
    1,051,958
    
    
    $
    855,931
    
    
    $
    787,799
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF INCOME (unaudited)
 Three Months Ended
    
    
    Nine Months Ended(In thousands, except share and per share data)
    
    09/30/07
    
    
    09/30/06
    
    
    09/30/07
    
    
    09/30/06Interest incomeInterest on loans, including fees
    
    $
    17,565
    
    
    $
    13,505
    
    
    $
    51,949
    
    
    $
    38,129Interest on securities, available for sale
    
    
    160
    
    
    
    204
    
    
    
    501
    
    
    
    519Interest on federal funds
    
    
    84
    
    
    
    155
    
    
    
    361
    
    
    
    376Interest on deposits with banks
    
    
    42
    
    
    
    6
    
    
    
    84
    
    
    
    152Total interest income
    
    
    17,851
    
    
    
    13,870
    
    
    
    52,895
    
    
    
    39,176Interest expenseInterest on deposits
    
    
    8,663
    
    
    
    6,332
    
    
    
    24,687
    
    
    
    16,783Interest on other borrowings
    
    
    497
    
    
    
    467
    
    
    
    1,808
    
    
    
    1,100Interest on subordinated debentures
    
    
    190
    
    
    
    225
    
    
    
    655
    
    
    
    635Total interest expense
    
    
    9,350
    
    
    
    7,024
    
    
    
    27,150
    
    
    
    18,518Net interest income
    
    
    8,501
    
    
    
    6,846
    
    
    
    25,745
    
    
    
    20,658Provision for loan losses
    
    
    4,060
    
    
    
    470
    
    
    
    4,966
    
    
    
    782Net interest income after provision for loan losses
    
    
    4,441
    
    
    
    6,376
    
    
    
    20,779
    
    
    
    19,876Non-interest incomeService charges on deposit accounts
    
    
    290
    
    
    
    184
    
    
    
    939
    
    
    
    507Fees for other services to customers
    
    
    29
    
    
    
    12
    
    
    
    98
    
    
    
    38Gain on the sale of loans
    
    
    34
    
    
    
    (8
    )
    
    
    135
    
    
    
    102Write-down of real estate
    
    
    (496
    )
    
    
    
    
    
    
    (596
    )
    
    
    Loss on the sale of real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (103
    )Gain on the sale of securities
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9Other income
    
    
    39
    
    
    
    13
    
    
    
    122
    
    
    
    32Total non-interest income
    
    
    (104
    )
    
    
    210
    
    
    
    698
    
    
    
    585Non-interest expensesSalaries and employee benefits
    
    
    3,137
    
    
    
    2,637
    
    
    
    9,791
    
    
    
    7,514Occupancy and equipment expense
    
    
    903
    
    
    
    602
    
    
    
    2,748
    
    
    
    1,827Amortization of intangible assets
    
    
    240
    
    
    
    63
    
    
    
    912
    
    
    
    188Advertising and marketing
    
    
    119
    
    
    
    138
    
    
    
    339
    
    
    
    339Stationery and supplies
    
    
    124
    
    
    
    124
    
    
    
    480
    
    
    
    285Professional services
    
    
    301
    
    
    
    220
    
    
    
    787
    
    
    
    578Data processing
    
    
    114
    
    
    
    124
    
    
    
    442
    
    
    
    380Other operating expenses
    
    
    553
    
    
    
    306
    
    
    
    1,558
    
    
    
    914Total non-interest expenses
    
    
    5,491
    
    
    
    4,214
    
    
    
    17,057
    
    
    
    12,025Income (loss) before income tax provision
    
    
    (1,154
    )
    
    
    2,372
    
    
    
    4,420
    
    
    
    8,436Income tax provision (benefit)
    
    
    (299
    )
    
    
    807
    
    
    
    1,652
    
    
    
    2,869Net income (loss)
    
    $
    (855
    )
    
    $
    1,565
    
    
    $
    2,768
    
    
    $
    5,567Per share data:Net income (loss)  basic
    
    $
    (0.10
    )
    
    $
    0.26
    
    
    $
    0.32
    
    
    $
    0.93Net income (loss)  diluted
    
    $
    (0.10
    )
    
    $
    0.25
    
    
    $
    0.31
    
    
    $
    0.89Weighted average number of shares outstanding  basic
    
    
    8,510,207
    
    
    
    5,927,333
    
    
    
    8,692,562
    
    
    
    5,966,112Weighted average number of shares outstanding  diluted
    
    
    8,510,207
    
    
    
    6,238,365
    
    
    
    8,935,941
    
    
    
    6,278,024
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
 Three Months Ended
    
    
    Nine Months Ended(In thousands)
    
    09/30/07
    
    
    09/30/06
    
    
    09/30/07
    
    
    09/30/06Net income (loss)
    
    
    ($855
    )
    
    $
    1,565
    
    
    $
    2,768
    
    
    $
    5,567Other comprehensive income, net of taxUnrealized gains on securities available for saleUnrealized holding gains arising during
during period
    
    
    15
    
    
    
    4
    
    
    
    25
    
    
    
    15Deferred tax effects
    
    
    (5
    )
    
    
    (1
    )
    
    
    (7
    )
    
    
    (5
    )Other comprehensive income
    
    
    10
    
    
    
    3
    
    
    
    18
    
    
    
    10Comprehensive income (loss)
    
    
    ($845
    )
    
    $
    1,568
    
    
    $
    2,786
    
    
    $
    5,577
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months Ended(In thousands)
    
    9/30/2007
    
    
    9/30/2006Cash flows from operating activitiesInterest and fees received
    
    $
    51,974
    
    
    $
    38,897Interest paid
    
    
    (27,523
    )
    
    
    (17,693
    )Proceeds from sale of mortgages held for sale
    
    
    16,365
    
    
    
    16,810Origination of mortgages held for sale
    
    
    (14,791
    )
    
    
    (16,611
    )Taxes paid
    
    
    (3,322
    )
    
    
    (3,490
    )Loss on sale of real estate owned
    
    
    
    
    
    
    (103
    )Cash paid to suppliers and employees
    
    
    (18,803
    )
    
    
    (10,993
    )Net cash provided by operating activities
    
    
    3,900
    
    
    
    6,817Cash flows from investing activitiesProceeds from the sale of securities available for sale
    
    
    18,007
    
    
    
    Proceeds from calls, maturities and repayments of
of securities available for sale
    
    
    6,657
    
    
    
    30,669Purchases of securities available for sale
    
    
    (29,198
    )
    
    
    (19,039
    )(Purchase) sale of Federal Home Loan Bank stock
    
    
    (639
    )
    
    
    3Increase in loans, net of payments received
    
    
    (13,785
    )
    
    
    (83,968
    )Purchases of property and equipment
    
    
    (5,108
    )
    
    
    (1,087
    )Net cash paid in Fidelity acquisition
    
    
    (32,122
    )
    
    
    Net cash used in investing activities
    
    
    (56,188
    )
    
    
    (73,422
    )Cash flows from financing activitiesNet decrease in non-interest bearing deposits
    
    
    (6,303
    )
    
    
    (5,360
    )Net increase in interest bearing deposits
    
    
    47,074
    
    
    
    74,033Decrease in other borrowings
    
    
    (128
    )
    
    
    (27
    )Net increase (decrease) in federal funds purchased
    
    
    (37,300
    )
    
    
    10,200Proceeds from Federal Home Loan Bank advances
    
    
    9,101
    
    
    
    (984
    )Purchase of common stock
    
    
    (8,411
    )
    
    
    (2,824
    )Exercise of stock options
    
    
    62
    
    
    
    174Tax benefit of stock options exercised
    
    
    223
    
    
    
    58Net cash provided by financing activities
    
    
    4,318
    
    
    
    75,270Increase (decrease) in cash and cash equivalents
    
    
    (47,970
    )
    
    
    8,665Cash and cash equivalents at the beginning of the period
    
    
    70,030
    
    
    
    9,455Cash and cash equivalents at the end of the period
    
    $
    22,060
    
    
    $
    18,120
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 Nine Months Ended(In thousands)
    
    9/30/2007
    
    
    9/30/2006Reconciliation of net income to net cash provided by operating activitiesNet income
    
    $
    2,768
    
    
    $
    5,567Adjustments to reconcile net income to net cash
provided by operating activitiesProvision for loan losses
    
    
    4,966
    
    
    
    782Depreciation and amortization expense
    
    
    1,070
    
    
    
    706Restricted stock award expense
    
    
    (84
    )
    
    
    101Stock option expense
    
    
    (36
    )
    
    
    45Accretion of discount on securities
    
    
    (202
    )
    
    
    (272
    )Amortization of premium on securities
    
    
    1
    
    
    
    8Writedown of other real estate owned
    
    
    596
    
    
    
    Amortization of intangible assets
    
    
    911
    
    
    
    188(Increase) decrease in mortgages held for sale
    
    
    1,439
    
    
    
    (55
    )(Increase) decrease in interest receivable
    
    
    323
    
    
    
    (282
    )(Increase) decrease in other assets
    
    
    (5,286
    )
    
    
    825Increase (decrease) in interest payable
    
    
    (710
    )
    
    
    (257
    )Decrease in other liabilities
    
    
    (1,856
    )
    
    
    (539
    )Net cash provided by operating activities
    
    $
    3,900
    
    
    $
    6,817Supplemental noncash disclosures:Transfers from loans to real estate owned
    
    $
    3,911
    
    
    $
    91Noncash investing activities:Fidelity Bank acquisition:Loans acquired
    
    
    178,052
    
    
    
    Premises and equipment acquired
    
    
    9,214
    
    
    
    Acquisition intangibles recorded
    
    
    38,977
    
    
    
    Other assets acquired
    
    
    2,194
    
    
    
    Deposits assumed
    
    
    (187,635
    )
    
    
    Borrowings assumed
    
    
    (1,767
    )
    
    
    Other liabilities assumed
    
    
    (2,299
    )
    
    
    Net assets acquired
    
    $
    36,736
    
    
    
    
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A.
    
    Accounting and Reporting PoliciesThe consolidated financial statements of Dearborn Bancorp, Inc. (the Corporation) include
the consolidation of its only subsidiary, Fidelity Bank (the Bank), formerly known as
Community Bank of Dearborn. As discussed in Note E, the Corporation acquired Fidelity
Financial Corporation of Michigan and its subsidiary, Fidelity Bank on January 4, 2007. As
a result of the acquisition, Fidelity Bank was merged into the Corporations subsidiary. On
April 30, 2007, the Community Bank of Dearborn was renamed Fidelity 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 September 30, 2007 and 2006,
and December 31, 2006 and for the three and nine month periods ended September 30, 2007 and
2006 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 three and nine month periods ended September 30,
2007 are not necessarily indicative of results of operations for the entire year.The consolidated financial statements as of September 30, 2007 and 2006, and for the three
and nine months ended September 30, 2007 and 2006 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
annual 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 thereto included in the Corporations 2006 Annual Report 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 impairment of securities.
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A.
    
    Accounting and Reporting Policies (cont)Income Per ShareBasic income per share is net income divided by the weighted average number of common shares
outstanding during the period. Diluted income per share includes the dilutive effect of
unvested stock awards and additional potential common shares issuable under stock options.
Income per share is restated for all stock splits and dividends through the date of issue of
the financial statements.Stock options for 35,244 and 33,565 shares of common stock were not considered in computing
diluted earnings per common share for the nine months ended September 30, 2007 and 2006,
respectively, because they were antidilutive. Stock options for 515,401 and 33,565 shares
of common stock were not considered in computing diluted earnings per common share for the
three months ended September 30, 2007 and 2006, respectively because they were antidilutive.
All share and per share amounts have been adjusted for stock dividends.Effect of Newly Issued Accounting StandardsFinancial Accounting Standards Board (FASB) Interpretation 48, Accounting for Uncertainty
in Income Taxes (FIN 48), was adopted as of January 1, 2007. A tax position is recognized
as a benefit only if it is more likely than not that the tax position would be sustained
in a tax examination, with a tax examination being presumed to occur. The amount recognized
is the largest amount of tax benefit that is greater than 50% likely of being realized on
examination. For tax positions not meeting the more than likely than not test, no tax
benefit is recorded. The adoption had no material affect on the Corporations consolidated
financial statements. The Corporation is no longer subject to examination by federal taxing
authorities for years before 2004.
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Effect of Newly Issued but not yet Effective Accounting StandardsIn February 2006, FASB issued Statement No. 159, The Fair Value Option for Financial Assets
and Liabilities (SFAS 159). Adoption of SFAS 159 is required for January 1, 2008. Early
adoption was allowed, effective to January 1, 2007, if that election was made by April 30,
2007. This statement allows, but does not require, companies to record certain assets and
liabilities at their fair value. The fair value determination is made at the instrument
level, so similar assets or liabilities could be partially accounted for using the
historical cost method, while other similar assets or liabilities are accounted for using
the fair value method. Changes in fair value are recorded through the income statement in
subsequent periods. The statement provides for a one time opportunity to transfer existing
assets and liabilities to fair value at the point of adoption with a cumulative effect
adjustment recorded against equity. After adoption, the election to report assets or
liabilities at fair value must be made at the point of their inception. The Corporation did
not elect early adoption of SFAS 159 and has not yet determined which, if any, assets or
liabilities may be reported using the fair value accounting method. As such, the Corporation
has not yet determined the impact that the adoption of this statement may have on the
Corporations consolidated financial statements.In September 2006, FASB issued Statement No. 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. This Statement establishes a fair value
hierarchy about the assumptions used to measure fair value and clarifies assumptions abour
risk and the effect of a restriction on the sale or use of an asset. The standard is
effective for fiscal years beginning after November 15, 2007. The Corporation has not
completed its evaluation of the impact of the adoption of this standard.
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B.
    
    Securities Available For SaleThe amortized cost and fair value of securities available for sale are as follows (in
thousands):
 September 30, 2007Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueUS Treasury securities
    
    $
    9,534
    
    
    $
    6
    
    
    
    ($2
    )
    
    $
    9,538Municipal bonds
    
    
    759
    
    
    
    10
    
    
    
    
    
    
    
    769Mortgage backed securities
    
    
    330
    
    
    
    3
    
    
    
    
    
    
    
    333Totals
    
    $
    10,623
    
    
    $
    19
    
    
    
    ($2
    )
    
    $
    10,640
 December 31, 2006Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueUS Treasury securities
    
    $
    4,982
    
    
    $
    
    
    
    
    ($14
    )
    
    $
    4,968Municipal bonds
    
    
    497
    
    
    
    4
    
    
    
    
    
    
    
    501Mortgage backed securities
    
    
    407
    
    
    
    2
    
    
    
    
    
    
    
    409Totals
    
    $
    5,886
    
    
    $
    6
    
    
    
    ($14
    )
    
    $
    5,878
 The amortized cost and fair value of securities available for sale at September 30, 2007 by
contractual maturity are shown below (in thousands):
 Amortized
    
    
    FairCost
    
    
    ValueDue in less than three months
    
    $
    5,740
    
    
    $
    5,743Due in three months through one year
    
    
    3,794
    
    
    
    3,795Due in one year through five years
    
    
    759
    
    
    
    769Mortgage backed securities
    
    
    330
    
    
    
    333Totals
    
    $
    10,623
    
    
    $
    10,640
 12




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##### Table of Contents



B.
    
    Securities Available For Sale (cont)The entire portfolio has a net unrealized gain of $17,000 at September 30, 2007. Securities
with unrealized losses at September 30, 2007, aggregated by investment category and the
length of time that the securities have been in a continuous loss position, are as follows
(in thousands):
 Fair Value
    
    
    Unrealized LossInvestment categoryUS treasury securities
    
    $
    4,315
    
    
    $
    2Total temporarily impaired
    
    $
    4,315
    
    
    $
    2
 Fair Value
    
    
    Unrealized LossLength of time in a continuous loss positionLess than one year
    
    $
    2,315
    
    
    $
    1One to three years
    
    
    2,000
    
    
    
    1Total temporarily impaired
    
    $
    4,315
    
    
    $
    2
 Unrealized losses on securities, available for sale at September 30, 2007 have not been
recognized because these securities are of high credit quality, management has the intent
and ability to hold these securities for the foreseeable future, and the decline in fair
value is believed to be largely due to changes in interest rates. The fair value is
expected to recover as the bonds approach their maturity date.The Corporation does not hold any securities in the Held to Maturity category nor does the
Corporation hold or utilize derivatives.
 13




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##### Table of Contents



C.
    
    Allowance for Loan LossesThe following is a summary of non-performing assets at September 30, 2007 and December 31,
2006 (in thousands):
 09/30/07
    
    
    12/31/06Over 90 days past due and still accruing
    
    $
    2,673
    
    
    $
    2,101Non-accrual loans
    
    
    17,297
    
    
    
    5,560Total non-performing loans
    
    
    19,970
    
    
    
    7,661Real estate owned
    
    
    3,338
    
    
    
    52Other repossessed assets
    
    
    0
    
    
    
    2Other non-performing assets
    
    
    3,338
    
    
    
    54Total non-performing assets
    
    $
    23,308
    
    
    $
    7,715
 Activity in the allowance for loan losses for the three and nine month periods ended
September 30, 2007 and 2006 are as follows (in thousands):
 Three Months
    
    
    Three MonthsEnded
    
    
    Ended09/30/07
    
    
    09/30/06Balance, beginning of period
    
    $
    9,949
    
    
    $
    7,154Charge-offs
    
    
    3,887
    
    
    
    32Recoveries
    
    
    187
    
    
    
    23Net charge-offs
    
    
    3,700
    
    
    
    9Provision for loan losses
    
    
    4,060
    
    
    
    470Balance, end of period
    
    $
    10,309
    
    
    $
    7,615
 Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended09/30/07
    
    
    09/30/06Balance, beginning of period
    
    $
    7,775
    
    
    $
    6,808Allowance on loans from acquisition
    
    
    1,704
    
    
    
    Charge-offs
    
    
    4,521
    
    
    
    114Recoveries
    
    
    385
    
    
    
    139Net charge-offs (recoveries)
    
    
    4,136
    
    
    
    (25
    )Provision for loan losses
    
    
    4,966
    
    
    
    782Balance, end of period
    
    $
    10,309
    
    
    $
    7,615
 14




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##### Table of Contents



D.
    
    Incentive Stock PlansIncentive stock awards have been granted to officers and employees under two Incentive Stock
Plans. The first plan is the 1994 Stock Option Plan. Options to buy common stock have been
granted to officers and employees under the 1994 Stock Option Plan, which provides for issue
of up to 814,449 shares. Exercise price is the market price at date of grant. The maximum
option term is ten years, and options vest fully after six months from the date of grant.A summary of the option activity in the 1994 Plan follows:
 WeightedAvailable
    
    
    
    
    
    
    Averagefor
    
    
    Options
    
    
    ExerciseGrant
    
    
    Outstanding
    
    
    PriceOutstanding at January 1, 2007
    
    
    
    
    
    
    468,423
    
    
    $
    8.16Exercised
    
    
    
    
    
    
    (14,741
    )
    
    
    4.41Outstanding at September 30, 2007
    
    
    
    
    
    
    453,682
    
    
    $
    8.29
 For the options outstanding at September 30, 2007, the range of exercise prices was $4.18 to
$14.65 per share with a weighted-average remaining contractual term of 3.7 years. At
September 30, 2007, 453,682 options were exercisable at weighted average exercise price of
$8.29 per share. The intrinsic value of options exercised during the year was approximately
$206,000 and the intrinsic value of options outstanding at September 30, 2007 was
approximately $2,102,000.During 2005, the Corporation initiated the 2005 Long-Term Incentive Plan. Under this plan,
up to 347,248 shares may be granted to officers and employees of the Bank. This plan
provides that stock awards may take the form of any combination of options, restricted
shares, restricted share units or performance awards.The administration of the plan, including the granting of awards and the nature of those
awards, is determined by the Corporations Compensation Committee. The Corporations Board
of Directors approved grants of performance-based stock options and restricted stock in 2005
and 2006. The awards have a term of ten years and typically vest fully three years from the
grant date. In order for vesting to occur, the Corporation must meet certain performance
criteria over the vesting period. The actual cost of these awards could range from zero to
150% of the currently recorded compensation cost, depending on the Corporations actual
performance. The expected compensation cost of the performance-based awards was being
calculated assuming the Corporations attainment of target performance goals over the
vesting period of the awards. In the third quarter of 2007, the performance awards were
modified because the original performance criteria and vesting requirements were no longer
considered to be reasonable
or attainable and the Corporation wanted to maintain more practical incentives for the award
recipients. The cost recorded by the Corporation was adjusted during the third quarter of
2007 by reversing the expense recorded for the original awards and recognizing expense for
the modified awards based on the vesting to date and the modified terms and performance
targets.
 15




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##### Table of Contents



D.
    
    Incentive Stock Plans (cont)Accounting for the modified performance-based awards is summarized as follows:Stock Options Granted  The incentive stock options were granted with exercise prices equal
to market prices on the day of grant. At September 30, 2007, there were 35,251 stock
options granted with a weighted average exercise price, as modified, of $13.06. These
options are eligible to vest fully three years from grant date.The Corporation reversed expense related to stock options of $120,000 and recognized
compensation expense of $40,000 in the third quarter of 2007 due to the award modifications.
The expense that was reversed is comprised of $76,000 from the grant date through December
31, 2006 and $44,000 for the nine months ended September 30, 2007. The expense for the
modified awards recognized related to stock options is comprised of $20,000 from the grant
date through December 31, 2006 and $20,000 for the nine months ended September 30, 2007.Restricted Stock Grants   Restricted stock was awarded to officers in 2005 and 2006. The
restricted stock is eligible to vest three years from grant date. At September 30, 2007,
there were 23,956 shares of restricted stock outstanding.The Corporation reversed expense related to restricted stock of $270,000 and
recognized expense of $87,000 in the third quarter of 2007 due to the award modifications.
The expense that was reversed is comprised of $172,000 from the grant date through December
31, 2006 and $98,000 for the nine months ended September 30, 2007. The expense for the
modified awards recognized related to restricted stock is comprised of $45,000 from the
grant date through December 31, 2006 and $42,000 for the nine months ended September 30,
2007.
 16




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##### Table of Contents



E.
    
    AcquisitionOn January 4, 2007, the Corporation acquired Fidelity Financial Corporation of Michigan and
its subsidiary, Fidelity Bank (collectively Fidelity) for $70,500,000 in cash. Fidelity
was founded in 1973 and has its main office in Birmingham, Michigan with single branch
offices in Bloomfield Township, Michigan and Bingham Farms, Michigan and four branch offices
in Southfield, Michigan. As of December 31, 2006, Fidelity had total assets of
$220,419,000, gross loans of $179,553,000 and total deposits of $187,547,000. Fidelitys
results of operations are included in these financial statements since the date of
acquisition.The acquisition of Fidelity will enable the Corporation to build a competitive presence in
Oakland County for the Banks loan and deposit products. Management expects to build upon
Fidelitys reputation and continue to increase the Banks presence in Oakland County, while
decreasing operating expenses by utilizing the infrastructure and operational capabilities
already in place at the Bank.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 annually. Goodwill and other intangible assets are tax deductible
over 15 years. Currently, identified intangible assets from the acquisition of Fidelity
subject to amortization are $10,422,000. Goodwill from the acquisition of Fidelity
aggregates to $28,555,000.The table displayed on the following page presents pro forma information for the Corporation
including the acquisition of Fidelity for the three and nine months ended September 30, 2006
as if the acquisition had occurred at the beginning of 2006. The pro forma financial
information does not purport to be indicative of the operating results or financial position
that would have actually occurred or existed if the transactions had occurred on the dates
indicated, nor is it indicative of our future operating results or our financial position.
 17




---



##### Table of Contents



E.
    
    Acquisition (cont)
 Three Months Ended
    
    
    Nine Months Ended(In thousands, except share and per share data
    
    09/30/06
    
    
    09/30/06Interest income
    
    $
    17,925
    
    
    $
    50,925Interest expense
    
    
    8,390
    
    
    
    22,116Net interest income
    
    
    9,535
    
    
    
    28,809Provision for loan losses
    
    
    560
    
    
    
    1,032Net interest income after provision
for loan losses
    
    
    8,975
    
    
    
    27,777Non-interest income
    
    
    563
    
    
    
    1,687Non-interest expense
    
    
    6,193
    
    
    
    18,456Income before income tax provision
    
    
    3,345
    
    
    
    11,008Income tax provision
    
    
    1,139
    
    
    
    3,744Net income
    
    $
    2,206
    
    
    $
    7,264Per share data:Net income  basic
    
    $
    0.25
    
    
    $
    0.80Net income  diluted
    
    $
    0.24
    
    
    $
    0.78Weighted average shares outstanding  basic
    
    
    8,991,496
    
    
    
    9,030,275Weighted average shares outstanding  diluted
    
    
    9,302,528
    
    
    
    9,342,187
 F.
    
    Stockholders EquityStockholders equity at September 30, 2007 was $139,524,000 compared to $144,985,000 as of
December 31, 2006. Activity in Stockholders equity during 2007 is listed below (in thousands):
 AmountBalance, beginning of period
    
    $
    144,985Purchase of
common stock (527,300 shares)
    
    
    (8,411
    )Stock awards
and options earned
    
    
    (121
    )Exercise of stock options (14,741 shares)
    
    
    62Tax effect
of exersised stock options
    
    
    223Net income
    
    
    2,768Other comprehensive income
    
    
    18Balance, end of period
    
    $
    139,524
 18




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##### Table of Contents



PART I    FINANCIAL INFORMATION
 
     Company Overview
   19




---



##### Table of Contents



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
   20




---



##### Table of Contents



21




---



##### Table of Contents



Date Opened
    
    Location
    
    Type of officeFebruary 1994
    
    22290 Michigan Avenue
    
    Full service retail branch with ATMDearborn, Michigan 48123
    
    Regional lending certerDecember 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 48326October 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 certerOctober 2004
    
    2180 West Stadium Blvd.
    
    Full service retail branch with ATMAnn Arbor, MI 48103December 2004
    
    1360 Porter Street
    
    Loan production officeDearborn, MI 48123
    
    Regional lending centerJanuary 2007
    
    1040 E. Maple
    
    Full service retail branch with ATMBirmingham, MI 48009
    
    Regional lending certerJanuary 2007
    
    3681 W. Maple
    
    Full service retail branch with ATMBirmingham, MI 48301January 2007
    
    30700 Telegraph
    
    Full service retail branch with ATMBingham Farms, Mi 48025January 2007
    
    20000 Twelve Mile Road
    
    Full service retail branch with ATMSouthfield, Mi 48076January 2007
    
    26555 Evergreen
    
    Full service retail branch with ATMSouthfield, Mi 48076January 2007
    
    200 Galleria Officenter
    
    Full service retail branch with ATMSouthfield, Mi 48034April 2007
    
    7755 23 Mile Road
    
    Full service retail branch with ATMShelby Township, MI 48316
 22




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##### Table of Contents



Results of Operations
  Net Interest Income
 2007 Compared to 2006.
 Average Balances, Interest Rates and Yields.
 23




---



##### Table of Contents



Three months ended September 30,
    
    
    Three months ended September 30,2007
    
    
    2006Average
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(In thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsInterest-bearing deposits with banks
    
    $
    3,553
    
    
    $
    42
    
    
    
    4.69
    %
    
    $
    491
    
    
    $
    6
    
    
    
    4.85
    %Federal funds sold
    
    
    6,983
    
    
    
    84
    
    
    
    4.77
    %
    
    
    11,436
    
    
    
    155
    
    
    
    5.38
    %Securities available for sale
    
    
    12,672
    
    
    
    160
    
    
    
    5.01
    %
    
    
    17,307
    
    
    
    204
    
    
    
    4.68
    %Loans (1)
    
    
    946,732
    
    
    
    17,565
    
    
    
    7.36
    %
    
    
    715,783
    
    
    
    13,505
    
    
    
    7.48
    %Total earning assets
    
    
    969,940
    
    
    
    17,851
    
    
    
    7.30
    %
    
    
    745,017
    
    
    
    13,870
    
    
    
    7.38
    %Other assets
    
    
    82,245
    
    
    
    
    
    
    
    
    
    
    
    29,712Total assets
    
    $
    1,052,185
    
    
    
    
    
    
    
    
    
    
    $
    774,729Liabilities and stockholders equityInterest bearing deposits
    
    $
    759,712
    
    
    $
    8,663
    
    
    
    4.52
    %
    
    $
    578,425
    
    
    $
    6,332
    
    
    
    4.34
    %Other borrowings
    
    
    50,028
    
    
    
    687
    
    
    
    5.45
    %
    
    
    48,621
    
    
    
    692
    
    
    
    5.65
    %Total interest bearing liabilities
    
    
    809,740
    
    
    
    9,350
    
    
    
    4.58
    %
    
    
    627,046
    
    
    
    7,024
    
    
    
    4.44
    %Non-interest bearing deposits
    
    
    95,247
    
    
    
    
    
    
    
    
    
    
    
    57,649Other liabilities
    
    
    4,094
    
    
    
    
    
    
    
    
    
    
    
    2,486Stockholders equity
    
    
    143,104
    
    
    
    
    
    
    
    
    
    
    
    87,548Total liabilities and stockholders equity
    
    $
    1,052,185
    
    
    
    
    
    
    
    
    
    
    $
    774,729Net interest income
    
    
    
    
    
    $
    8,501
    
    
    
    
    
    
    
    
    
    
    $
    6,846Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.72
    %
    
    
    
    
    
    
    
    
    
    
    2.94
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    3.48
    %
    
    
    
    
    
    
    
    
    
    
    3.65
    %
 
 (1)
    
    Non-accrual loans included 24




---



##### Table of Contents



Nine months ended September 30,
    
    
    Nine months ended September 30,2007
    
    
    2006Average
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    Average(In thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsInterest-bearing deposits with banks
    
    $
    2,479
    
    
    $
    84
    
    
    
    4.53
    %
    
    $
    4,427
    
    
    $
    152
    
    
    
    4.59
    %Federal funds sold
    
    
    8,546
    
    
    
    361
    
    
    
    5.65
    %
    
    
    9,929
    
    
    
    376
    
    
    
    5.06
    %Securities available for sale
    
    
    13,327
    
    
    
    501
    
    
    
    5.03
    %
    
    
    15,849
    
    
    
    519
    
    
    
    4.38
    %Loans (1)
    
    
    942,000
    
    
    
    51,949
    
    
    
    7.37
    %
    
    
    688,178
    
    
    
    38,129
    
    
    
    7.41
    %Total earning assets
    
    
    966,352
    
    
    
    52,895
    
    
    
    7.32
    %
    
    
    718,383
    
    
    
    39,176
    
    
    
    7.29
    %Other assets
    
    
    81,286
    
    
    
    
    
    
    
    
    
    
    
    30,508Total assets
    
    $
    1,047,638
    
    
    
    
    
    
    
    
    
    
    $
    748,891Liabilities and stockholders equityInterest bearing deposits
    
    $
    744,886
    
    
    $
    24,687
    
    
    
    4.43
    %
    
    $
    559,676
    
    
    $
    16,783
    
    
    
    4.01
    %Other borrowings
    
    
    57,543
    
    
    
    2,463
    
    
    
    5.72
    %
    
    
    41,908
    
    
    
    1,735
    
    
    
    5.54
    %Total interest bearing liabilities
    
    
    802,429
    
    
    
    27,150
    
    
    
    4.52
    %
    
    
    601,584
    
    
    
    18,518
    
    
    
    4.12
    %Non-interest bearing deposits
    
    
    95,799
    
    
    
    
    
    
    
    
    
    
    
    58,152Other liabilities
    
    
    4,990
    
    
    
    
    
    
    
    
    
    
    
    2,128Stockholders equity
    
    
    144,420
    
    
    
    
    
    
    
    
    
    
    
    87,027Total liabilities and stockholders equity
    
    $
    1,047,638
    
    
    
    
    
    
    
    
    
    
    $
    748,891Net interest income
    
    
    
    
    
    $
    25,745
    
    
    
    
    
    
    
    
    
    
    $
    20,658Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.80
    %
    
    
    
    
    
    
    
    
    
    
    3.17
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    3.56
    %
    
    
    
    
    
    
    
    
    
    
    3.84
    %
 
 (1)
    
    Non-accrual loans included 25




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##### Table of Contents



Rate/Volume Analysis.
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30.2007/2006
    
    
    2007/2006Change 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
    
    $
    36
    
    
    
    
    
    
    $
    36
    
    
    
    ($67
    )
    
    
    ($1
    )
    
    
    ($68
    )Federal funds sold
    
    
    (54
    )
    
    
    (17
    )
    
    
    (71
    )
    
    
    (44
    )
    
    
    29
    
    
    
    (15
    )Securities available for sale
    
    
    (58
    )
    
    
    14
    
    
    
    (44
    )
    
    
    (72
    )
    
    
    54
    
    
    
    (18
    )Loans
    
    
    4,283
    
    
    
    (223
    )
    
    
    4,060
    
    
    
    13,938
    
    
    
    (118
    )
    
    
    13,820Total earning assets
    
    $
    4,207
    
    
    $
    (226
    )
    
    $
    3,981
    
    
    $
    13,755
    
    
    $
    (36
    )
    
    $
    13,719LiabilitiesInterest bearing deposits
    
    $
    2,069
    
    
    
    262
    
    
    $
    2,331
    
    
    $
    6,724
    
    
    $
    1,180
    
    
    $
    7,904Other borrowings
    
    
    19
    
    
    
    (24
    )
    
    
    (5
    )
    
    
    689
    
    
    
    39
    
    
    
    728Total interest bearing liabilities
    
    $
    2,088
    
    
    $
    238
    
    
    $
    2,326
    
    
    $
    7,413
    
    
    $
    1,219
    
    
    $
    8,632Net interest income
    
    
    
    
    
    
    
    
    
    $
    1,655
    
    
    
    
    
    
    
    
    
    
    $
    5,087Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    (0.22
    %)
    
    
    
    
    
    
    
    
    
    
    (0.38
    %)Net interest margin on earning
assets
    
    
    
    
    
    
    
    
    
    
    (0.17
    %)
    
    
    
    
    
    
    
    
    
    
    (0.28
    %)
 26




---



##### Table of Contents



Provision for Loan Losses
 2007 Compared to 2006.
 Non-interest Income
 2007 Compared to 2006.
 27




---



##### Table of Contents



Non-interest Expense
 2007 Compared to 2006.
  Income Taxes
 2007 Compared to 2006.
 28




---



##### Table of Contents



Comparison of Financial Condition at September 30, 2007 and December 31, 2006
 Assets.
 Federal Funds Sold.
 Interest bearing deposits with banks.
 Mortgage Loans Held for Sale.
 Securities Available for Sale.
  Federal Home Loan Bank Stock.
 Loans.
 29




---



##### Table of Contents



09/30/07
    
    
    12/31/06
    
    
    09/30/06Consumer loans
    
    $
    35,696
    
    
    $
    32,282
    
    
    $
    33,261Commercial, financial, & other
    
    
    188,155
    
    
    
    130,056
    
    
    
    127,024Commercial construction  residential property
    
    
    47,435
    
    
    
    55,696
    
    
    
    56,589Commercial construction  non residential
property
    
    
    43,689
    
    
    
    41,360
    
    
    
    44,346Land development loans  residential property
    
    
    24,643
    
    
    
    22,380
    
    
    
    21,248Land development loans  non residential
property
    
    
    14,961
    
    
    
    15,870
    
    
    
    11,018Commercial real estate mortgages
    
    
    537,068
    
    
    
    410,829
    
    
    
    402,008Residential real estate mortgages
    
    
    53,975
    
    
    
    47,947
    
    
    
    45,536945,622
    
    
    
    756,420
    
    
    
    741,030Allowance for loan losses
    
    
    (10,309
    )
    
    
    (7,775
    )
    
    
    (7,615
    )$
    935,313
    
    
    $
    748,645
    
    
    $
    733,415
  09/30/07
    
    
    12/31/06
    
    
    09/30/06Over 90 days past due and still accruing
    
    $
    2,673
    
    
    $
    2,101
    
    
    $
    189Non-accrual loans
    
    
    17,297
    
    
    
    5,560
    
    
    
    4,602Total non-performing loans
    
    
    19,970
    
    
    
    7,661
    
    
    
    4,791Real estate owned
    
    
    3,338
    
    
    
    52
    
    
    
    52Other repossessed assets
    
    
    
    
    
    
    2
    
    
    
    Other non-performing assets
    
    
    3,338
    
    
    
    54
    
    
    
    52Total non-performing assets
    
    $
    23,308
    
    
    $
    7,715
    
    
    $
    4,843
   30




---



##### Table of Contents



Number ofLoans
    
    
    BalanceConsumer loans
    
    
    5
    
    
    $
    465Commercial, financial, & other
    
    
    7
    
    
    
    1,882Commercial real estate construction  residential property
    
    
    11
    
    
    
    4,180Commercial real estate construction  non residential property
    
    
    
    
    
    
    Land development loans  residential property
    
    
    11
    
    
    
    6,895Land development loans  non residential property
    
    
    
    
    
    
    Commercial real estate mortgages
    
    
    12
    
    
    
    3,684Residential real estate mortgages
    
    
    2
    
    
    
    191Total non-accrual loans
    
    
    48
    
    
    $
    17,297
 Allowance for Loan Losses.
  31




---



##### Table of Contents



Nine Months
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    Year Ended
    
    
    Ended09/30/07
    
    
    12/31/06
    
    
    09/30/06Balance, beginning of year
    
    $
    7,775
    
    
    $
    6,808
    
    
    $
    6,808Allowance on loans from acquisition
    
    
    1,704
    
    
    
    
    
    
    
    Charge-offs:Consumer loans
    
    
    190
    
    
    
    24
    
    
    
    Commercial, financial & other
    
    
    829
    
    
    
    139
    
    
    
    40Commercial real estate construction  residential property
    
    
    1,344
    
    
    
    
    
    
    
    Commercial real estate construction  non residential
property
    
    
    14
    
    
    
    
    
    
    
    Land development loans  residential property
    
    
    1,378
    
    
    
    
    
    
    
    Land development loans  non residential property
Commercial real estate mortgages
    
    
    446
    
    
    
    36
    
    
    
    36Residential real estate mortgages
    
    
    320
    
    
    
    38
    
    
    
    38Recoveries:Consumer loans
    
    
    23
    
    
    
    17
    
    
    
    16Commercial, financial & other
    
    
    223
    
    
    
    218
    
    
    
    102Commercial real estate construction  residential property
    
    
    
    
    
    
    
    
    
    
    Commercial real estate construction  non residential
property
    
    
    
    
    
    
    
    
    
    
    Land development loans  residential property
    
    
    
    
    
    
    
    
    
    
    Land development loans  non residential property
    
    
    
    
    
    
    
    
    
    
    Commercial real estate mortgages
    
    
    139
    
    
    
    26
    
    
    
    21Residential real estate mortgages
    
    
    
    
    
    
    
    
    
    
    Net charge-offs (recoveries)
    
    
    4,136
    
    
    
    (24
    )
    
    
    (25
    )Additions charged to operations
    
    
    4,966
    
    
    
    943
    
    
    
    782Balance, end of period
    
    $
    10,309
    
    
    $
    7,775
    
    
    $
    7,615Allowance to total loans
    
    
    1.09
    %
    
    
    1.03
    %
    
    
    1.03
    %Allowance to nonperforming loans
    
    
    51.62
    %
    
    
    101.49
    %
    
    
    158.94
    %Net charge-offs to average loans
    
    
    0.44
    %
    
    
    0.00
    %
    
    
    0.00
    %
 Premises and Equipment.
 Real estate owned.
 32




---



##### Table of Contents



Goodwill and other intangible assets.
 GrossCarrying
    
    
    AccumulatedAmount
    
    
    AmortizationCore deposit intangible from acquisition of:Bank of Washtenaw
    
    $
    929
    
    
    $
    374Fidelity Financial Corporation of Michigan
    
    
    6,864
    
    
    
    562Total core deposit intangible
    
    $
    7,793
    
    
    $
    936Borrower relationship intangible from acquisition of:Bank of Washtenaw
    
    $
    1,620
    
    
    $
    327Fidelity Financial Corporation of Michigan
    
    
    3,558
    
    
    
    157Total borrower relationship intangible
    
    $
    5,178
    
    
    $
    484Total intangible assets
    
    $
    12,971
    
    
    $
    1,420
   Accrued Interest Receivable.
 Other Assets
 33




---



##### Table of Contents



Deposits.
 09/30/07
    
    
    12/31/06
    
    
    09/30/06Non-interest bearing:Demand
    
    $
    92,770
    
    
    $
    53,065
    
    
    $
    54,292Interest bearing:Checking
    
    $
    65,751
    
    
    $
    62,770
    
    
    $
    101,587Money market
    
    
    110,044
    
    
    
    14,289
    
    
    
    14,928Savings
    
    
    32,629
    
    
    
    42,169
    
    
    
    45,004Time, under $100,000
    
    
    185,335
    
    
    
    130,898
    
    
    
    128,834Time, $100,000 and over
    
    
    375,005
    
    
    
    330,025
    
    
    
    306,466768,764
    
    
    
    580,151
    
    
    
    596,819Total deposits
    
    $
    861,534
    
    
    $
    633,216
    
    
    $
    651,111
   09/30/07
    
    
    12/31/06
    
    
    09/30/06Interest bearing checking
    
    $
    2,472
    
    
    $
    889
    
    
    $
    1,008Time, $100,000 and over
    
    
    113,635
    
    
    
    115,362
    
    
    
    101,259Total municipal deposits
    
    $
    116,107
    
    
    $
    116,251
    
    
    $
    102,267
  34




---



##### Table of Contents



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




---



##### Table of Contents



Capital
   MinimumTo Be Well CapitalizedMinimum for Capital
    
    Under Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAs of September 30, 2007Total capital
(to risk weighted assets)Consolidated
    
    
    114,242
    
    
    
    11.67
    %
    
    
    78,337
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    109,223
    
    
    
    11.18
    %
    
    
    78,144
    
    
    
    8.00
    %
    
    
    97,680
    
    
    
    10.00
    %Tier 1 capital
(to risk weighted assets)Consolidated
    
    
    103,933
    
    
    
    10.61
    %
    
    
    39,168
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    98,914
    
    
    
    10.13
    %
    
    
    39,072
    
    
    
    4.00
    %
    
    
    58,608
    
    
    
    6.00
    %Tier 1 capital
(to average assets)Consolidated
    
    
    103,933
    
    
    
    10.33
    %
    
    
    40,258
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    98,914
    
    
    
    9.87
    %
    
    
    40,070
    
    
    
    4.00
    %
    
    
    50,088
    
    
    
    5.00
    %As of December 31, 2006Total capital
(to risk weighted assets)Consolidated
    
    
    155,252
    
    
    
    19.69
    %
    
    
    63,066
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    85,451
    
    
    
    11.06
    %
    
    
    61,826
    
    
    
    8.00
    %
    
    
    77,283
    
    
    
    10.00
    %Tier 1 capital
(to risk weighted assets)Consolidated
    
    
    147,477
    
    
    
    18.71
    %
    
    
    31,533
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    77,676
    
    
    
    10.05
    %
    
    
    30,913
    
    
    
    4.00
    %
    
    
    46,370
    
    
    
    6.00
    %Tier 1 capital
(to average assets)Consolidated
    
    
    147,477
    
    
    
    18.12
    %
    
    
    32,555
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    77,676
    
    
    
    10.11
    %
    
    
    30,739
    
    
    
    4.00
    %
    
    
    38,424
    
    
    
    5.00
    %
  36




---



##### Table of Contents



PART I    FINANCIAL INFORMATION
 
  Interest Rate Sensitivity Analysis.
   37




---



##### Table of Contents



Interest Rate Sensitivity Period1-90
    
    
    91-365
    
    
    1-5
    
    
    Over(In thousands)
    
    Days
    
    
    Days
    
    
    Years
    
    
    5 Years
    
    
    TotalEarning assetsFederal funds sold
    
    $
    7,031
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7,031Interest bearing deposits with Banks
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100Mortgage loans held for sale
    
    
    384
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    384Securities available for sale
    
    
    5,741
    
    
    
    3,915
    
    
    
    838
    
    
    
    146
    
    
    
    10,640Federal Home Loan Bank stock
    
    
    1,927
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,927Total loans, net of non-accrual
    
    
    271,130
    
    
    
    95,184
    
    
    
    515,301
    
    
    
    46,710
    
    
    
    928,325Total earning assets
    
    
    286,313
    
    
    
    99,099
    
    
    
    516,139
    
    
    
    46,856
    
    
    
    948,407Interest bearing liabilitiesTotal interest bearing deposits
    
    
    391,287
    
    
    
    323,268
    
    
    
    53,689
    
    
    
    520
    
    
    
    768,764Federal Home Loan Bank advances
    
    
    5,000
    
    
    
    5,394
    
    
    
    26,035
    
    
    
    
    
    
    
    36,429Other Borrowings
    
    
    491
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    491Trust preferred securities
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Total interest bearing liabilities
    
    
    406,778
    
    
    
    328,662
    
    
    
    79,724
    
    
    
    520
    
    
    
    815,684Net asset (liability) funding gap
    
    
    (120,465
    )
    
    
    (229,563
    )
    
    
    436,415
    
    
    
    46,336
    
    
    $
    132,723Cumulative net asset (liability) funding gap
    
    
    ($120,465
    )
    
    
    ($350,028
    )
    
    $
    86,387
    
    
    $
    132,723
 38




---



##### Table of Contents



Liquidity.
  Contractual ObligationsPayments Due By PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    Over 51 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    Years
    
    
    TotalSecurities sold under
agreements
to repurchase
    
    $
    491
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    491Certificates of deposit
    
    
    506,131
    
    
    
    36,061
    
    
    
    17,628
    
    
    
    520
    
    
    
    560,340Long-term borrowings
    
    
    10,394
    
    
    
    25,625
    
    
    
    410
    
    
    
    
    
    
    
    36,429Lease commitments
    
    
    748
    
    
    
    1,347
    
    
    
    540
    
    
    
    
    
    
    
    2,635Subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    10,000Totals
    
    $
    517,764
    
    
    $
    63,033
    
    
    $
    18,578
    
    
    $
    10,520
    
    
    $
    609,895
  Amount Of Commitment Expiration Per PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    Over 51 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    Years
    
    
    TotalUnused loan commitments
    
    $
    115,738
    
    
    $
    13,933
    
    
    $
    8,161
    
    
    $
    14,972
    
    
    $
    152,804Standby letters of credit
    
    
    6,846
    
    
    
    1,879
    
    
    
    
    
    
    
    2,000
    
    
    
    10,725Totals
    
    $
    122,584
    
    
    $
    15,812
    
    
    $
    8,161
    
    
    $
    16,972
    
    
    $
    163,529
 39




---



##### Table of Contents



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




---



##### Table of Contents



PART II    OTHER INFORMATION
 
   Exhibit 31.1
    
    CEO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 31.2
    
    CFO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 32.1
    
    CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.Exhibit 32.2
    
    CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  41




---



##### Table of Contents



SIGNATURES
  Dearborn Bancorp, Inc.

(Registrant)/s/ John E. Demmer

John E. DemmerChairman/s/ Michael J. Ross

Michael J. RossPresident and Chief Executive Officer/s/ Jeffrey L. Karafa

Jeffrey L. KarafaTreasurer and Chief Financial Officer
  42