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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly period ended June 30, 2009
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission file number 000-24478.
 DEARBORN BANCORP, INC.
  Michigan
    
    38-3073622(State or other jurisdiction of
    
    (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)
  þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ
  Class
    
    Shares OutstandingCommon Stock
    
    7,687,470




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##### 



PagePart I. Financial Information:Item 1. Financial StatementsThe following condensed consolidated financial statements of
Dearborn Bancorp, Inc. and its subsidiary are included in this report:Report of Independent Registered Public Accounting Firm
    
    
    3Condensed Consolidated Balance Sheets  June 30, 2009,
December 31, 2008 and June 30, 2008
    
    
    4Condensed Consolidated Statements of Operation  For the Three
and Six Months Ended June 30, 2009 and 2008
    
    
    5Condensed
Consolidated Statements of Comprehensive Loss  For the
Three and Six Months Ended June 30, 2009 and 2008
    
    
    6Condensed Consolidated Statements of Cash Flows  For the Three
And Six Months Ended June 30, 2009 and 2008
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    9-26Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    27-44Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    45-48Item 4. Controls and Procedures
    
    
    49Part II. Other Information:Pursuant to SEC rules and regulations, the following item(s) are
included with the Form 10-Q Report:Item 4. Submission of Matters to a Vote of Security Holders
    
    
    50Item 6. Exhibits and Reports on Form 8-K
    
    
    50Pursuant to SEC rules and regulations, the following items are omitted
from this Form 10-Q as inapplicable or to which the answer is negative:Item 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults upon Senior SecuritiesItem 5. Other InformationSIGNATURES
    
    
    51EX-31.1EX-31.2EX-32.1EX-32.2
  2




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3




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PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
 (Dollars, in thousands)06/30/09
    
    
    12/31/08
    
    
    06/30/08ASSETSCash and cash equivalentsCash and due from banks
    
    $
    25,475
    
    
    $
    11,671
    
    
    $
    12,778Federal funds sold
    
    
    1,425
    
    
    
    4,455
    
    
    
    1,301Interest bearing deposits with banks
    
    
    18,454
    
    
    
    36,876
    
    
    
    147Total cash and cash equivalents
    
    
    45,354
    
    
    
    53,002
    
    
    
    14,226Mortgage loans held for sale
    
    
    60
    
    
    
    1,834
    
    
    
    755Investment securities, available for sale
    
    
    3,257
    
    
    
    84,148
    
    
    
    9,381Federal Home Loan Bank stock
    
    
    3,698
    
    
    
    3,614
    
    
    
    3,540LoansLoans
    
    
    882,568
    
    
    
    933,269
    
    
    
    944,081Allowance for loan loss
    
    
    (22,422
    )
    
    
    (14,452
    )
    
    
    (16,638
    )Net loans
    
    
    859,396
    
    
    
    918,817
    
    
    
    927,443Premises and equipment, net
    
    
    20,784
    
    
    
    21,272
    
    
    
    21,630Real estate owned
    
    
    17,434
    
    
    
    9,657
    
    
    
    5,411Goodwill
    
    
    0
    
    
    
    0
    
    
    
    34,028Other intangible assets
    
    
    4,195
    
    
    
    4,592
    
    
    
    10,487Accrued interest receivable
    
    
    3,512
    
    
    
    3,499
    
    
    
    3,757Other assets
    
    
    31,360
    
    
    
    21,483
    
    
    
    7,880Total assets
    
    $
    989,800
    
    
    $
    1,121,918
    
    
    $
    1,038,538LIABILITIESDepositsNon-interest bearing deposits
    
    $
    83,752
    
    
    $
    81,317
    
    
    $
    82,798Interest bearing deposits
    
    
    729,415
    
    
    
    857,078
    
    
    
    741,124Total deposits
    
    
    813,167
    
    
    
    938,395
    
    
    
    823,922Other liabilitiesFederal funds purchased
    
    
    0
    
    
    
    0
    
    
    
    3,600Securities sold under agreements to repurchase
    
    
    2,206
    
    
    
    2,461
    
    
    
    171Federal Home Loan Bank advances
    
    
    73,955
    
    
    
    65,019
    
    
    
    65,401Accrued interest payable
    
    
    1,104
    
    
    
    1,695
    
    
    
    2,047Other liabilities
    
    
    1,491
    
    
    
    1,037
    
    
    
    1,026Subordinated debentures
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000Total liabilities
    
    
    901,923
    
    
    
    1,018,607
    
    
    
    906,167STOCKHOLDERS EQUITYCommon stock  20,000,000 shares authorized,
7,687,470 shares at 06/30/09, 7,696,204
shares at
12/31/08; and 8,055,698 shares at 06/30/08
    
    
    131,866
    
    
    
    131,784
    
    
    
    133,048Accumulated deficit
    
    
    (43,998
    )
    
    
    (28,675
    )
    
    
    (688
    )Accumulated other comprehensive income
    
    
    9
    
    
    
    202
    
    
    
    11Total stockholders equity
    
    
    87,877
    
    
    
    103,311
    
    
    
    132,371Total liabilities and stockholders equity
    
    $
    989,800
    
    
    $
    1,121,918
    
    
    $
    1,038,538
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
 (In thousands, except share and per share data)
    
    Three Months Ended
    
    
    Six Months Ended06/30/09
    
    
    06/30/08
    
    
    06/30/09
    
    
    06/30/08Interest incomeInterest on loans, including fees
    
    $
    13,286
    
    
    $
    14,994
    
    
    $
    27,096
    
    
    $
    31,168Interest on securities, available for sale
    
    
    178
    
    
    
    109
    
    
    
    434
    
    
    
    218Interest on federal funds
    
    
    6
    
    
    
    21
    
    
    
    12
    
    
    
    36Interest on deposits with banks
    
    
    103
    
    
    
    1
    
    
    
    197
    
    
    
    2Total interest income
    
    
    13,573
    
    
    
    15,125
    
    
    
    27,739
    
    
    
    31,424Interest expenseInterest on deposits
    
    
    5,458
    
    
    
    5,874
    
    
    
    11,456
    
    
    
    12,902Interest on other borrowings
    
    
    473
    
    
    
    812
    
    
    
    1,019
    
    
    
    1,805Interest on subordinated debentures
    
    
    105
    
    
    
    155
    
    
    
    210
    
    
    
    380Total interest expense
    
    
    6,036
    
    
    
    6,841
    
    
    
    12,685
    
    
    
    15,087Net interest income
    
    
    7,537
    
    
    
    8,284
    
    
    
    15,054
    
    
    
    16,337Provision for loan losses
    
    
    13,610
    
    
    
    8,746
    
    
    
    24,337
    
    
    
    9,632Net interest income (loss) after provision for loan losses
    
    
    (6,073
    )
    
    
    (462
    )
    
    
    (9,283
    )
    
    
    6,705Non-interest income (loss)Service charges on deposit accounts
    
    
    375
    
    
    
    363
    
    
    
    730
    
    
    
    743Fees for other services to customers
    
    
    37
    
    
    
    27
    
    
    
    62
    
    
    
    66Gain on the sale of loans
    
    
    160
    
    
    
    51
    
    
    
    216
    
    
    
    104Write-down of real estate
    
    
    (1,506
    )
    
    
    (100
    )
    
    
    (1,860
    )
    
    
    (300
    )Loss on the sale of real estate
    
    
    (32
    )
    
    
    (469
    )
    
    
    (3
    )
    
    
    (704
    )Gain on the sale of securities
    
    
    270
    
    
    
    
    
    
    
    465
    
    
    
    Write-down of other assets
    
    
    
    
    
    
    
    
    
    
    (100
    )
    
    
    Other income
    
    
    125
    
    
    
    73
    
    
    
    247
    
    
    
    147Total non-interest income (loss)
    
    
    (571
    )
    
    
    (55
    )
    
    
    (243
    )
    
    
    56Non-interest expensesSalaries and employee benefits
    
    
    3,208
    
    
    
    3,284
    
    
    
    6,498
    
    
    
    6,493Occupancy and equipment expense
    
    
    916
    
    
    
    950
    
    
    
    1,850
    
    
    
    1,863Intangible expense
    
    
    199
    
    
    
    322
    
    
    
    397
    
    
    
    645FDIC Assessment
    
    
    833
    
    
    
    174
    
    
    
    1,181
    
    
    
    348Advertising and marketing
    
    
    59
    
    
    
    131
    
    
    
    129
    
    
    
    254Stationery and supplies
    
    
    109
    
    
    
    171
    
    
    
    220
    
    
    
    304Professional services
    
    
    173
    
    
    
    259
    
    
    
    364
    
    
    
    485Data processing
    
    
    238
    
    
    
    232
    
    
    
    466
    
    
    
    457Defaulted loan expense
    
    
    926
    
    
    
    511
    
    
    
    1,687
    
    
    
    946Other operating expenses
    
    
    442
    
    
    
    394
    
    
    
    822
    
    
    
    871Total non-interest expense
    
    
    7,103
    
    
    
    6,428
    
    
    
    13,614
    
    
    
    12,666Loss before income tax provision
    
    
    (13,747
    )
    
    
    (6,945
    )
    
    
    (23,140
    )
    
    
    (5,905
    )Income tax benefit
    
    
    (4,672
    )
    
    
    (2,331
    )
    
    
    (7,816
    )
    
    
    (1,967
    )Net loss
    
    $
    (9,075
    )
    
    $
    (4,614
    )
    
    $
    (15,324
    )
    
    $
    (3,938
    )Per share data:Net loss  basic
    
    $
    (1.19
    )
    
    $
    (0.57
    )
    
    $
    (2.00
    )
    
    $
    (0.49
    )Net loss  diluted
    
    $
    (1.19
    )
    
    $
    (0.57
    )
    
    $
    (2.00
    )
    
    $
    (0.49
    )Weighted average number of shares outstanding  basic
    
    
    7,644,207
    
    
    
    8,051,037
    
    
    
    7,644,198
    
    
    
    8,095,379Weighted average number of shares outstanding  diluted
    
    
    7,644,207
    
    
    
    8,051,037
    
    
    
    7,644,198
    
    
    
    8,095,379
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited)
 (In thousands)
    
    Three Months Ended
    
    
    Six Months Ended06/30/09
    
    
    06/30/08
    
    
    06/30/09
    
    
    06/30/08Net loss
    
    $
    (9,075
    )
    
    $
    (4,614
    )
    
    $
    (15,324
    )
    
    $
    (3,938
    )Other comprehensive loss, net of taxUnrealized losses on securitiesUnrealized holding losses arising during
during period
    
    
    (350
    )
    
    
    (43
    )
    
    
    (757
    )
    
    
    (14
    )Less: reclassification adjustment for gains
included in net income
    
    
    270
    
    
    
    
    
    
    
    465
    
    
    
    Tax effects
    
    
    27
    
    
    
    15
    
    
    
    99
    
    
    
    5Other comprehensive loss
    
    
    (53
    )
    
    
    (28
    )
    
    
    (193
    )
    
    
    (9
    )Comprehensive loss
    
    $
    (9,128
    )
    
    $
    (4,642
    )
    
    $
    (15,517
    )
    
    $
    (3,947
    )
  6




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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
    
    Six Months Ended6/30/2009
    
    
    6/30/2008Cash flows from operating activitiesInterest and fees received
    
    $
    27,726
    
    
    $
    31,483Interest paid
    
    
    (13,276
    )
    
    
    (17,458
    )Proceeds from sale of mortgages held for sale
    
    
    21,654
    
    
    
    12,020Origination of mortgages held for sale
    
    
    (19,561
    )
    
    
    (11,278
    )Taxes paid (refunded)
    
    
    
    
    
    
    (181
    )Proceeds from the sale of real estate owned
    
    
    1,217
    
    
    
    6,143Cash paid to suppliers and employees
    
    
    (12,581
    )
    
    
    (10,302
    )Net cash provided by operating activities
    
    
    5,179
    
    
    
    10,427Cash flows from investing activitiesProceeds from the sale of securities available for sale
    
    
    50,126
    
    
    
    6,850Proceeds from calls, maturities and repayments of
of securities available for sale
    
    
    51,033
    
    
    
    79Purchases of securities available for sale
    
    
    (21,459
    )
    
    
    (7,332
    )Purchase of Federal Home Loan Bank stock
    
    
    (84
    )
    
    
    (1,468
    )Increase in loans, net of payments received
    
    
    24,281
    
    
    
    (843
    )Purchases of property and equipment
    
    
    (177
    )
    
    
    (215
    )Net cash used in investing activities
    
    
    103,720
    
    
    
    (2,929
    )Cash flows from financing activitiesNet increase (decrease) in non-interest bearing deposits
    
    
    2,435
    
    
    
    (796
    )Net increase (decrease) in interest bearing deposits
    
    
    (127,663
    )
    
    
    2,091Decrease in other borrowings
    
    
    (255
    )
    
    
    (309
    )Net increase (decrease) in federal funds payable
    
    
    
    
    
    
    (26,500
    )Proceeds from Federal Home Loan Bank advances
    
    
    8,936
    
    
    
    24,031Purchase of common stock
    
    
    
    
    
    
    (1,271
    )Net cash provided by financing activities
    
    
    (116,547
    )
    
    
    (2,754
    )Increase (decrease) in cash and cash equivalents
    
    
    (7,648
    )
    
    
    4,744Cash and cash equivalents at the beginning of the period
    
    
    53,002
    
    
    
    9,482Cash and cash equivalents at the end of the period
    
    $
    45,354
    
    
    $
    14,226
  7




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DEARBORN BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 (In thousands)
    
    Three Months Ended6/30/2009
    
    
    6/30/2008Reconciliation of net income to net cash provided by operating activitiesNet income
    
    
    ($15,324
    )
    
    
    ($3,938
    )Adjustments to reconcile net income to net cash
provided by operating activitiesProvision for loan losses
    
    
    24,337
    
    
    
    9,632Depreciation and amortization expense
    
    
    665
    
    
    
    683Restricted stock award expense
    
    
    44
    
    
    
    28Stock option expense
    
    
    39
    
    
    
    13Accretion of discount on investment securities
    
    
    149
    
    
    
    (89
    )Amortization of premium on investment securities
    
    
    
    
    
    
    Amortization of intangible assets
    
    
    397
    
    
    
    646(Increase) decrease in mortgages held for sale
    
    
    1,774
    
    
    
    561Increase in interest receivable
    
    
    (13
    )
    
    
    59Decrease in interest payable
    
    
    (591
    )
    
    
    (1,121
    )(Increase) decrease in real estate owned
    
    
    3,026
    
    
    
    6,143(Increase) decrease in other assets
    
    
    (9,778
    )
    
    
    (1,528
    )Decrease in other liabilities
    
    
    454
    
    
    
    (662
    )Net cash provided by operating activities
    
    $
    5,179
    
    
    $
    10,427Supplemental noncash disclosures:Transfers from loans to real estate owned
    
    $
    10,803
    
    
    $
    5,235
  8




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A.
    
    Accounting and Reporting Policies
 The condensed consolidated financial statements of Dearborn Bancorp, Inc. (the
Corporation) include the consolidation of its only subsidiary, Fidelity Bank (the
Bank). The accounting and reporting policies of the Corporation are in accordance with
accounting principles generally accepted in the United States of America and conform to
practice within the banking industry.
 The condensed consolidated financial statements of the Corporation as of June 30, 2009 and
2008, and December 31, 2008 and for the three and six month periods ended June 30, 2009 and
2008 reflect all adjustments, consisting of normal recurring items which are in the opinion
of management, necessary for a fair presentation of the results for the interim period.
The consolidated condensed balance sheet of the Corporation as of December 31, 2008 has
been derived from the audited consolidated balance sheet as of that date. The operating
results for the three and six month periods ended June 30, 2009 are not necessarily
indicative of results of operations for the entire year.
 The condensed consolidated financial statements as of June 30, 2009 and 2008, and for the
three and six month periods ended June 30, 2009 and 2008 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 2008 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 impairments of securities.
 9




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A.
    
    Accounting and Reporting Policies (cont)
 Income (Loss) Per Share
 Basic income (loss) per share is net income (loss) divided by the weighted average number of common
shares outstanding during the period. Diluted income (loss) per share includes the dilutive
effect of additional potential common shares issuable under stock options. Income (loss)
per share is restated for all stock splits and dividends through the date of issue of the
financial statements.
 Factors in the basic and diluted income (loss) per share calculation follow (in thousands,
except share and per share data):
 Six Months Ended6/30/2009
    
    
    6/30/2008BasicNet income (loss)
    
    $
    (15,324
    )
    
    $
    (3,938
    )Weighted average common shares
    
    
    7,644,198
    
    
    
    8,051,037Basic
earnings (loss) per common share
    
    $
    (2.00
    )
    
    $
    (0.49
    )DilutedNet income (loss)
    
    $
    (15,324
    )
    
    $
    (3,938
    )Weighted average common shares outstanding
for basic earnings per common share
    
    
    7,644,198
    
    
    
    8,051,037Add: Dilutive effects of assumed exercise
of stock options
    
    
    
    
    
    
    Average shares and dilutive potential common shares
    
    
    7,644,198
    
    
    
    8,051,037Dilutive
earnings (loss) per common share
    
    $
    (2.00
    )
    
    $
    (0.49
    )
 Stock options for 592,777 and 485,993 shares of common stock were not considered in
computing diluted earnings per common share for the six months ended June 30, 2009 and 2008,
respectively, because they were antidilutive. All share and per share amounts have been
adjusted for stock dividends.
 10




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A.
    
    Accounting and Reporting Policies (cont)
 Effect of Newly Issued Accounting Standards
 SFAS No. 141 (revised 2007), Business Combinations
 The objective of this Statement is to improve the relevance, representational faithfulness
and comparability of the information that a reporting entity provides in its financial
reports about a business combination and its effects. This Statement introduces new
accounting concepts, and several of these changes have the potential to generate greater
earnings volatility, in connection with and after an acquisition. Some of the more
significant changes include:
 1.
    
    Transaction costs and restructuring charges will now be expensed.2.
    
    The accounting for certain assets acquired and liabilities assumed will change
significantly. The most significant to the Corporation being that allowance for loan losses
at acquisition date will be eliminated.3.
    
    Contingent consideration will be measured at fair value until settled.4.
    
    Equity issued in an acquisition will be valued at the closing date, as opposed to the
announcement date.5.
    
    Material adjustments made to the initial acquisition will be recorded back to the
acquisition date.
 The adoption of this statement did not have a material impact on the Corporations
consolidated financial statements.
 SFAS No. 160, Noncontrolling Interests in Consolidated Financial StatementsAn Amendment of
ARB No. 51
 This statement amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated financial
statements. Before this statement was issued, limited guidance existed for reporting
noncontrolling interests. As a result, considerable diversity in practice existed.
So-called minority interests were reported in the consolidated statement of financial
position as liabilities or in the mezzanine section between liabilities and equity. This
statement improves comparability by eliminating that diversity. The adoption of this
statement did not have a material impact on the Corporations consolidated financial
statements.
 11




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##### Table of Contents



A.
    
    Accounting and Reporting Policies (cont)
 SFAS No. 161, Disclosures About Derivative Instruments and Hedging ActivitiesAn Amendment
FASB Statement No. 133
 This Statement was issued in March 2008 and amends and expands the disclosure requirements
of SFAS No. 133 to provide greater transparency about (i) how and why an entity uses
derivative instruments, (ii) how derivative instruments and related hedge items are
accounted for under SFAS No. 133 and its related interpretations and (iii) how derivative
instruments and related hedged items affect an entitys financial position, results of
operations and cash flows. To meet those objectives, SFAS No. 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative disclosures
about fair value amounts of gains and losses on derivative instruments and disclosures about
credit-risk-related contingent features in derivative agreements. The adoption of this
statement did not have a material impact on the Corporations consolidated financial
statements.SFAS No. 165, Subsequent Events
 The FASB has issued FASB Statement No. 165, Subsequent Events. Statement 165 establishes
general standards of accounting for and disclosure of events that occur after the balance
sheet date but before financial statements are issued or are available to be issued.
Specifically, Statement 165 provides:
 The period after the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or disclosure in
the financial statements;
 The circumstances under which an entity should recognize events or transactions occurring
after the balance sheet date in its financial statements; and
 The disclosures that an entity should make about events or transactions that occurred after
the balance sheet date.
 Statement 165 was effective for interim or annual financial periods ending after June 15,
2009, and shall be applied prospectively. The adoption of this statement did not have a
material impact on the Corporations consolidated financial statements.
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A.
    
    Accounting and Reporting Policies (cont)
 SFAS No. 167, Amendments to FASB Interpretation No. 46(R)and SFAS No. 166, Accounting for
Transfers of Financial Assets- The FASB has issued the following two standards which change
the way entities account for securitizations and special-purpose entities:
 Statement 166 is a revision to FASB Statement No. 140,Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, and will require more information
about transfers of financial assets, including securitization transactions, and where
entities have continuing exposure to the risks related to transferred financial assets. It
eliminates the concept of a qualifying special-purpose entity, changes the requirements for
derecognizing financial assets, and requires additional disclosures.
 Statement 167 is a revision to FASB Interpretation No. 46 (Revised December
2003),Consolidation of Variable Interest Entities, and changes how a reporting entity
determines when an entity that is insufficiently capitalized or is not controlled through
voting (or similar rights) should be consolidated. The determination of whether a reporting
entity is required to consolidate another entity is based on, among other things, the other
entitys purpose and design and the reporting entitys ability to direct the activities of
the other entity that most significantly impact the other entitys economic performance.
 The new standards will require a number of new disclosures. Statement 167 will require a
reporting entity to provide additional disclosures about its involvement with variable
interest entities and any significant changes in risk exposure due to that involvement. A
reporting entity will be required to disclose how its involvement with a variable interest
entity affects the reporting entitys financial statements. Statement 166 enhances
information reported to users of financial statements by providing greater transparency
about transfers of financial assets and an entitys continuing involvement in transferred
financial assets.
 The Federal Reserve is reviewing regulatory capital requirements associated with the
adoption of the new accounting standards by financial institutions. In conducting this
review, the Federal Reserve is considering a broad range of factors including the
maintenance of prudent capital levels, the record of recent bank experiences with
off-balance sheet vehicles, and the results of the recent Supervisory Capital Assessment
Program (SCAP). As part of the SCAP, participating banking organizations capital adequacy
was assessed using assumptions consistent with standards ultimately included in FAS 166 and
FAS 167.
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A.
    
    Accounting and Reporting Policies (cont)
 Statements 166 and 167 will be effective at the start of a reporting entitys first fiscal
year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity.
Early application is not permitted. The Corporation does not expect this to have a material
impact on the Corporations financial statements.
 SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles, a Replacement of FASB Statement No. 162. SFAS 168 replaces
SFAS 162, The Hierarchy of Generally Accepted Accounting Principles and establishes the
FASB Accounting Standards Codification (the Codification) as the source of authoritative
accounting principles recognized by the FASB to be applied by non-governmental entities in
the preparation of financial statements in conformity with generally accepted accounting
principles. Rules and interpretive releases of the SEC under authority of federal securities
laws are also sources of authoritative guidance for SEC registrants. All guidance contained
in the Codification carries an equal level of authority. All non-grandfathered, non-SEC
accounting literature not included in the Codification is superseded and deemed
non-authoritative. SFAS 168 will be effective for the Corporations financial statements for
periods ending after September 15, 2009. SFAS 168 is not expected have a significant impact
on the Corporations financial statements.
 FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities. FSP EITF 03-6-1 provides that unvested
share-based payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be included in
the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1
became effective on January 1, 2009. See Note 1  Significant Accounting Policies.
 FSP SFAS. 132R-1, Employers Disclosures about Postretirement Benefit Plan Assets. FSP
SFAS 132R-1 provides guidance related to an employers disclosures about plan assets of
defined benefit pension or other post-retirement benefit plans. Under FSP SFAS 132R-1,
disclosures should provide users of financial statements with an understanding of how
investment allocation decisions are made, the factors that are pertinent to an understanding
of investment policies and strategies, the major categories of plan assets, the inputs and
valuation techniques used to measure the fair value of plan assets, the effect of fair value
measurements using significant unobservable inputs on changes in plan assets for the period
and significant concentrations of risk within plan assets. The disclosures required by FSP
SFAS 132R-1 will be included in the Corporations financial statements beginning with the
financial statements for the year-ended December 31, 2009.
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A.
    
    Accounting and Reporting Policies (cont)
 FASB Staff Position (FSP) FAS 141(R)-1, Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies
 This FSP amends and clarifies FAS 141(R), Business Combinations, regarding the initial
recognition and measurement, subsequent measurement and accounting and disclosure of assets
and liabilities arising from contingencies in a business combination. This FSP eliminates
the distinction between contractual and noncontractual contingencies discussed in FAS
141(R), specifies whether contingencies should be measured at fair value or in accordance
with FAS 5, provides application guidance on subsequent accounting for assets acquired and
liabilities assumed in a business combination that arise from contingencies and establishes
new disclosure requirements. This FSP is effective for assets or liabilities arising from
contingencies in business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008. The
adoption of this staff position did not have a material impact on the Corporations
consolidated financial statements.
 FSP FAS 157-4Determining Fair Value When the Volume and Level of Activity for The Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly
 This FSP, issued on April 9, 2009, provides additional guidance for estimating fair value in
accordance with FASB Statement No. 157, Fair Value Measurements,when the volume and level
of activity for the asset or liability have significantly decreased. This FSP also includes
guidance on identifying circumstances that indicate a transaction is not orderly. Even if
there has been a significant decrease in the volume and level of activity regardless of
valuation technique, the objective of a fair value measurement remains the same. Fair value
is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction (that is, not a forced liquidation or distressed sale) between market
participants at the measurement date under current market conditions. This FSP is effective
for interim reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009 only if FSP FAS 115-2 and FAS 124-2 and FSP FAS 107-1
and APG 28-1 are adopted concurrently. This FSP does not require disclosures for earlier
periods presented for comparative purposes at initial adoption. The adoption of this staff
position did not have a material impact on the Corporations consolidated financial
statements.
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A.
    
    Accounting and Reporting Policies (cont)
 FSP No. 115-2 and FAS 124-2Recognition and Presentation of Other-Than-Temporary
Impairments
 Issued on April 9, 2009, this FSP amends FASB Statement No. 107, Disclosures about Fair
Value of Financial Instrumentsand APB Opinion No. 28, Interim Financial Reporting,to
require disclosures about fair value of financial instruments for interim reporting periods
of publicly traded companies as well as in annual financial statements. This FSP is
effective for interim reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009 only if FSP FAS 157-4 and FSP FAS 107-1
and APG 28-1 are adopted concurrently. This FSP does not require disclosures for earlier
periods presented for comparative purposes at initial adoption. The adoption of this staff
position did not have a material impact on the Corporations consolidated financial
statements.FSP No. 107-1 and APG 28-1Interim Disclosures about Fair Value of Financial Instruments
 This FSP issued on April 9, 2009 amends the other-than-temporary guidance in U.S. generally
accepted accounting principles for debt securities to make the guidance more operational and
to improve the presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. This FSP does not amend existing recognition
and measurement guidance related to other-than-temporary impairments of equity securities
and does not require disclosures for earlier periods presented for comparative purposes at
initial adoption. Effective for interim reporting periods ending after June 15, 2009, early
adoption is permitted for periods ending after March 15, 2009 only if FSP FAS 157-4 and FSP
FAS 115-2 and FAS 124-2 are adopted concurrently. The adoption of this staff position did
not have a material impact on the Corporations consolidated financial statements.
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B.
    
    Securities Available For Sale


The amortized cost and fair value of securities available for sale are as follows (in
thousands):
 June 30, 2009Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueUS Government sponsored
agency securities
    
    $
    3,098
    
    
    $
    10
    
    
    
    
    
    
    $
    3,108Mortgage backed securities
    
    
    145
    
    
    
    4
    
    
    
    
    
    
    
    149Totals
    
    $
    3,243
    
    
    $
    14
    
    
    $
    
    
    
    $
    3,257
 December 31, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueUS Government sponsored
agency securities
    
    $
    21,175
    
    
    $
    226
    
    
    $
    (2
    )
    
    $
    21,399Corporate bonds
    
    
    13,185
    
    
    
    54
    
    
    
    (4
    )
    
    
    13,235Municipal securities
    
    
    1,303
    
    
    
    28
    
    
    
    
    
    
    
    1,331Mortgage backed securities
    
    
    179
    
    
    
    4
    
    
    
    
    
    
    
    183Money market mutual funds
    
    
    48,000
    
    
    
    
    
    
    
    
    
    
    
    48,000Totals
    
    $
    83,842
    
    
    $
    312
    
    
    $
    (6
    )
    
    $
    84,148
 The amortized cost and fair value of securities available for sale at June 30, 2009 by
contractual maturity are shown below (in thousands):
 Amortized
    
    
    FairCost
    
    
    ValueDue in less than one year
    
    
    1,000
    
    
    
    1,000Due in one year through five years
    
    
    2,098
    
    
    
    2,108Mortgage backed securities
    
    
    145
    
    
    
    149Totals
    
    $
    3,243
    
    
    $
    3,257
 The entire portfolio has a net unrealized gain of $14,000 at June 30, 2009. There were
no unrealized losses on securities, available for sale at June 30, 2009. The Corporation
does not hold any securities in the Held to Maturity category nor does the Corporation
hold or utilize derivatives.
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C.
    
    Loans
 The aggregate balance in impaired loans are as follows (in thousands):
 06/30/09
    
    
    12/31/08
    
    
    06/30/08Impaired loans with no allocated allowance for loan
losses
    
    $
    104,324
    
    
    $
    71,961
    
    
    $
    58,386Impaired loans with allocated allowance for loan losses
    
    
    
    
    
    
    26,908
    
    
    
    35,607Total
    
    $
    104,324
    
    
    $
    98,869
    
    
    $
    93,993Amount of the allowance for loan loss allocated
    
    $
    
    
    
    $
    5,273
    
    
    $
    8,102
 Regulatory requirements, documented in the in the discussion of Impaired Loans in the
Glossary of the FFIEC Call Report Instructions dictate that any collateral deficiency on
impaired loans that are collateral dependent must be immediately charged off. A collateral
deficiency exists where the loan balance exceeds the value of the underlying collateral. As
of June 30, 2009, the collateral deficiency of all collateral dependent impaired loans has
been charged off, resulting in no allocated allowances on impaired
loans.
 D.
    
    Incentive Stock Plans
 Incentive stock awards have been granted to officers and employees under two Incentive Stock
Plans. The first plan is the 1994 Stock Option Plan. Options to buy common stock have been
granted to officers and employees under the 1994 Stock Option Plan, which provides for issue
of up to 738,729 shares. Exercise price is the market price at date of grant. The maximum
option term is ten years, and options vest fully after six months from the date of grant.
 There was no option activity during the six months ended June 30, 2009. For the options
outstanding at June 30, 2009, the range of exercise prices was $4.18 to $14.65 per share
with a weighted-average remaining contractual term of 2.5 years. At June 30, 2009, 360,401
options were exercisable at weighted average exercise price of $8.65 per share. There were
no options exercised during the six months ended June 30, 2009. There was no intrinsic
value at June 30, 2009.
 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.
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D.
    
    Incentive Stock Plans (cont)
 The administration of the plan, including the granting of awards and the nature of those
awards is determined by the Corporations Compensation Committee. The Corporations Board
of Directors approved grants of stock options and restricted stock in 2005, 2006 and 2008.
The awards have a term of ten years and typically vest fully three years from the grant
date. In order for vesting to occur with some grants, the Corporation must meet certain
performance criteria over the vesting period. The expected compensation cost of the 2005
plan is being calculated assuming the Corporations attainment of target performance goals
over the vesting period of the awards. The actual cost of these awards could range from
zero to 100% of the currently recorded compensation cost, depending on the Corporations
actual performance. The awards granted in 2005 and 2006 did have such performance criteria.
The awards granted in 2008 did not have performance criteria.
 Stock Options Granted  Stock options were awarded to officers in 2005, 2006 and 2008. The
incentive stock options were granted with exercise prices equal to market prices on the day
of grant. At June 30, 2009, there were stock options outstanding for 182,113 shares with a
weighted average exercise price of $4.96 per share. At June 30, 2009, stock options for
70,846 shares were vested fully.
 The Corporation recognized stock option compensation expense
of $39,000 and $13,000 during
the six months ended June 30, 2009 and 2008, respectively. Compensation cost of $69,000 and
$62,000 is expected to be recognized during 2009 and 2010, respectively.
 Restricted Stock Grants   Restricted stock was awarded to officers in 2005, 2006 and 2008.
The restricted stock is eligible to vest three years from grant date. Upon full vesting,
restricted shares are transferred to common shares. At June 30, 2009, there were 41,530
shares of restricted stock outstanding.
 The Corporation recognized restricted stock compensation expense of $44,000 and $28,000,
respectively during the six months ended June 30, 2009. Compensation cost of $75,000 and
$62,000 is expected to be recognized during 2009 and 2010, respectively.
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E.
    
    Accumulated Other Comprehensive Income (Loss)


Other comprehensive loss components and related taxes for the six months ended June 30, 2009
were as follows:
 Net unrealized losses on securities available for sale
    
    $
    (292
    )Tax effects
    
    
    99Other comprehensive loss
    
    $
    (193
    )
 The components of accumulated other comprehensive income (loss) included in
stockholders equity at June 30, 2009 are as follows:
 Net unrealized gains on securities available for sale
    
    $
    14Tax effects
    
    
    5Other comprehensive income
    
    $
    9
 F.
    
    Fair Value of Assets and LiabilitiesEffective January 1, 2008, the Corporation adopted Statement of Financial Accounting
Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value
measurements. SFAS 157 has been applied prospectively as of the beginning of 2008.SFAS 157 defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity
to maximize the use of observable inputs when measuring fair value. The standard describes
three levels of inputs that may be used to measure fair value:
 Level 1 
    
    Quoted prices in active markets for identical assets or liabilitiesLevel 2 
    
    Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities
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F.
    
    Fair Value of Assets and Liabilities ( cont)
 Level 2 securities include U.S. agency and U.S. government sponsored
enterprise mortgage-backed securities. Level 2 securities are valued by a third
party pricing service commonly used in the banking industry utilizing observable
inputs. The pricing provider utilizes evaluated pricing models that vary based
on asset class. These models incorporate available market information including
quoted prices of securities with similar characteristics and, because many
fixed-income securities do not trade on a daily basis, apply available
information through processes such as benchmark curves, benchmarking of like
securities, sector grouping and matrix pricing. In addition, model processes,
such as an option adjusted spread model is used to develop prepayment and
interest rate scenarios for securities with prepayment features.Level 3 
    
    Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities
 Following is a description of the valuation methodologies used for instruments measured at
fair value on a recurring basis and recognized in the accompanying balance sheet, as well as
the general classification of such instruments pursuant to our valuation hierarchy.Securities available for saleFair values of securities, available for sale are estimated by a third party using inputs
that are observable or that can be corroborated by observable market data and, therefore,
are classified within Level 2 of the valuation hierarchy.The following table presents the fair value measurements of the Corporations assets and
liabilities recognized in the accompanying balance sheet measured at fair value on a
recurring basis and the level within the SFAS 157 fair value hierarchy in which the fair
value measurements fall at June 30, 2009, December 31, 2008 and June 30, 2008 (in
thousands):
 At 6/30/2009
    
    
    
    
    
    Quoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    InputsFair Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)US Government sponsored
agency securities
    
    $
    3,108
    
    
    $
    
    
    
    $
    3,108
    
    
    $
    Mortgage backed securities
    
    
    149
    
    
    
    
    
    
    
    149
    
    
    
    Securities, available for
sale
    
    $
    3,257
    
    
    $
    
    
    
    $
    3,257
    
    
    $
    
 At 12/31/2008
    
    
    
    
    
    Quoted Prices in
    
    Significant Other
    
    SignificantActive Markets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    InputsFair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Securities,
available for sale
    
    $
    84,148
    
    
    $
    48,000
    
    
    $
    36,148
    
    
    $
    
 At 6/30/2008
    
    
    
    
    
    Quoted Prices in
    
    Significant Other
    
    SignificantActive Markets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    InputsFair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Securities,
available for sale
    
    $
    9,381
    
    
    $
    6,829
    
    
    $
    2,552
    
    
    $
    
 Impaired loans and other real estate ownedFair value adjustments for impaired and non-accrual loans typically occur when there is
evidence of impairment. Loans are designated as impaired when, in the judgment of
management based on current information and events, it is probable that all amounts due
according to the contractual terms of the loan agreement will not be collected. The
measurement of loss associated with impaired loans can be based on either the observable
market price of the loan or the fair value of the collateral. The Company measures fair
value based on the value of the collateral securing the loans. Collateral may be in the form
of real estate or personal property including equipment and inventory. The value of the
collateral is determined based on internal estimates as well as third party appraisals or
non-binding broker quotes. These measurements were classified as Level 3. The fair value of
the Companys other real estate owned is determined using Level 3 inputs, which include
current and prior appraisals and estimated costs to sell.The following table presents the fair value measurements of the Corporations assets and
liabilities recognized in the accompanying balance sheet measured at fair value on a
non-recurring basis and the level within the SFAS 157 fair value hierarchy in which the fair
value measurements fall at June 30, 2009, December 31, 2008 and June 30, 2008 (in
thousands):
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F.
    
    Fair Value of Assets and Liabilities ( cont)
 At 6/30/2009
    
    
    
    
    
    Quoted Prices in
    
    Significant Other
    
    SignificantActive Markets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    InputsFair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Loans
    
    $
    37,219
    
    
    $
    
    
    
    $
    
    
    
    $
    37,219Other real estate
    
    $
    17,434
    
    
    $
    
    
    
    $
    
    
    
    $
    17,434
 At 12/31/2008
    
    
    
    
    
    Quoted Prices in
    
    Significant Other
    
    SignificantActive Markets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    InputsFair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Loans
    
    $
    41,907
    
    
    $
    
    
    
    $
    
    
    
    $
    41,907
 At 6/30/2008
    
    
    
    
    
    Quoted Prices in
    
    Significant Other
    
    SignificantActive Markets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    InputsFair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Loans
    
    $
    27,672
    
    
    $
    
    
    
    $
    
    
    
    $
    27,672
 The carrying amounts and estimated fair value of principle financial assets and liabilities
were as follows:
 At June 30, 2009
    
    At December 31, 2008Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueAssets:Cash and cash equivalents
    
    $
    45,354
    
    
    $
    45,354
    
    
    $
    53,002
    
    
    $
    53,002Mortgage loans held for sale
    
    
    60
    
    
    
    61
    
    
    
    1,834
    
    
    
    1,334Securities available for sale
    
    
    3,257
    
    
    
    3,257
    
    
    
    84,148
    
    
    
    84,148Federal Home Loan Bank Stock
    
    
    3,698
    
    
    
    3,698
    
    
    
    3,614
    
    
    
    3,614Loans, net
    
    
    882,568
    
    
    
    883,395
    
    
    
    933,269
    
    
    
    934,826Accrued interest receivable
    
    
    3,512
    
    
    
    3,512
    
    
    
    3,499
    
    
    
    3,499Liabilities:Deposits
    
    
    813,167
    
    
    
    818,051
    
    
    
    938,395
    
    
    
    945,017Securities sold under
agreements to repurchase
    
    
    2,206
    
    
    
    2,206
    
    
    
    2,461
    
    
    
    2,461Federal Home Loan Bank advances
    
    
    73,955
    
    
    
    74,778
    
    
    
    65,019
    
    
    
    66,390Subordinated debentures
    
    
    10,000
    
    
    
    10,005
    
    
    
    10,000
    
    
    
    10,028Accrued interest payable
    
    
    1,104
    
    
    
    1,104
    
    
    
    1,695
    
    
    
    1,695
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F.
    
    Fair Value of Assets and Liabilities ( cont)Carrying amount is the estimated fair value for cash and cash equivalents, Federal Home Loan
Bank stock, accrued interest receivable and payable, demand deposits, short-term debt, and
variable rate loans or deposits that reprice frequently or fully. Security fair values are
based on market prices or dealer quotes and, if no such information is available, on the
rate and term of the security and information about the issuer. For fixed rate loans or
deposits and for variable rate loans or deposits with infrequent repricing or repricing
limits, fair value is based on discounted cash flows using current market rates applied to
the estimated life and credit risk. Fair values for impaired loans are estimated using
discounted cash flow analysis or underlying collateral values. Fair value of loans held for
sale is based on market quotes. Fair value of debt is based on current rates for similar
financing. The fair value of off-balance-sheet items is based on the current fees or cost
that would be charged to enter into or terminate such arrangements, and is not considered
material to this presentation.
 G.
    
    Allowance for Loan Losses
 The allowance for loan losses was $22,422,000 at June 30, 2009 compared to $14,452,000 at
December 31, 2008, an increase of $7,970,000 or 55%. The increase was primarily due to net
charge-offs of $16,367,000 and the continuing deterioration of the underlying collateral of
the Banks non-performing loans. Regulatory requirements, documented in the in the
discussion of Impaired Loans in the Glossary of the FFIEC Call Report Instructions dictate
that any collateral deficiency on impaired loans that are collateral dependent must be
immediately charged off. A collateral deficiency exists where the loan balance exceeds the
value of the underlying collateral. As of June 30, 2009, the collateral deficiency of all
collateral dependent impaired loans has been charged off.
 The decision to recognize these charge-offs was based primarily on the continued decline in
the underlying value of our collateral and the accelerating decline during the second
quarter of 2009 in the economic environment in Southeastern Michigan. This decline in
economic conditions is heavily impacted by conditions and events that have recently impacted
the automotive industry during the first half of 2009, including the recent bankruptcy of
two major automotive manufacturers and resulting shut down of production and layoffs of
employees. These events will have a negative impact on the residential real estate and
commercial real estate markets in the Banks market area. These conditions have led to an
increase in the Banks classified assets during 2009. Management has recognized this trend
in our analysis of the allowance for loan losses at June 30, 2009. 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.
 23




---



##### Table of Contents



G.
    
    Allowance for Loan Losses (cont)
  Six Months
    
    
    
    
    
    
    Six MonthsEnded
    
    
    Year Ended
    
    
    Ended06/30/09
    
    
    12/31/08
    
    

06/30/08Balance, beginning of year
    
    $
    14,452
    
    
    $
    10,617
    
    
    $
    10,617Charge-offs:Consumer loans
    
    
    539
    
    
    
    318
    
    
    
    176Commercial, financial & other
    
    
    2,490
    
    
    
    4,304
    
    
    
    3,127Land development loans  residential property
    
    
    5,308
    
    
    
    1,777
    
    
    
    Land development loans  non residential property
    
    
    2,356
    
    
    
    
    
    
    
    Commercial real estate construction  residential property
    
    
    1,176
    
    
    
    1,635
    
    
    
    58Commercial real estate construction  non residential
property
    
    
    430
    
    
    
    192
    
    
    
    Commercial real estate mortgages
    
    
    3,708
    
    
    
    2,446
    
    
    
    190Residential real estate mortgages
    
    
    621
    
    
    
    296
    
    
    
    106Recoveries:Consumer loans
    
    
    11
    
    
    
    19
    
    
    
    11Commercial, financial & other
    
    
    189
    
    
    
    117
    
    
    
    31Land development loans  residential property
    
    
    28
    
    
    
    33
    
    
    
    Land development loans  non residential property
    
    
    
    
    
    
    
    
    
    
    Commercial real estate construction  residential property
    
    
    
    
    
    
    
    
    
    
    Commercial real estate construction  non residential
property
    
    
    
    
    
    
    3
    
    
    
    Commercial real estate mortgages
    
    
    26
    
    
    
    21
    
    
    
    4Residential real estate mortgages
    
    
    7
    
    
    
    4
    
    
    
    Net charge-offs
    
    
    16,367
    
    
    
    10,771
    
    
    
    3,611Provision for loan losses
    
    
    24,337
    
    
    
    14,606
    
    
    
    9,632Balance, end of period
    
    $
    22,422
    
    
    $
    14,452
    
    
    $
    16,638Allowance to total loans
    
    
    2.54
    %
    
    
    1.55
    %
    
    
    1.76
    %
 H.
    
    Income Taxes
 The federal tax provision consists of the following (in thousands):
 6/30/09
    
    
    12/31/08Current
    
    $
    (3,505
    )
    
    $
    (2,370
    )Deferred
    
    
    (4,311
    )
    
    
    (14,117
    )$
    (7,816
    )
    
    $
    (16,487
    )
 24




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##### Table of Contents



H.
    
    Income Taxes (cont)
 Deferred tax assets and liabilities are due to the following at December 31, (in thousands):
 6/30/09
    
    
    12/3108Deferred tax assetsAllowance for loan losses
    
    $
    7,623
    
    
    $
    4,913Net operating loss carryforward
    
    
    1,496
    
    
    
    Goodwill and other intangibles
    
    
    11,555
    
    
    
    11,877Capital loss carryforward
    
    
    251
    
    
    
    251Valuation allowance on capital loss carryforward
    
    
    (251
    )
    
    
    (251
    )Non accrual interest income
    
    
    100
    
    
    
    92Writedowns on other real estate owned
    
    
    990
    
    
    
    462Amortization of deferred issue costs
    
    
    80
    
    
    
    81Other
    
    
    78
    
    
    
    63Total deferred tax assets
    
    
    21,922
    
    
    
    17,488Deferred tax liabilitiesPremises and equipment
    
    
    (351
    )
    
    
    (300
    )Prepaid expenses
    
    
    (253
    )
    
    
    (259
    )Unrealized losses on securities available for sale
    
    
    (104
    )
    
    
    (104
    )Deferred loan fees and costs
    
    
    (99
    )
    
    
    (73
    )Other
    
    
    (118
    )
    
    
    (66
    )Total deferred tax liabilities
    
    
    (925
    )
    
    
    (802
    )Net deferred tax asset (liability)
    
    $
    20,997
    
    
    $
    16,686
 The increase in the deferred tax assets during 2009 is primarily due to net charge-offs
during the period. These charge-offs are primarily on the continued decline in the
underlying value of our collateral and the accelerating decline during the second quarter of
2009 in the economic environment in Southeastern Michigan. This decline in economic
conditions is heavily impacted by conditions and events that have recently impacted the
automotive industry during the first half of 2009, including the recent bankruptcy of two
major automotive manufacturers and resulting shut down of production and layoffs of
employees. The goodwill and other intangible assets acquired during 2004 and 2007 are being
amortized over 15 years for tax purposes and are tax deductible, but the goodwill is not
being amortized for book purposes. The impairment of goodwill and partial impairment of
other intangible assets generated a deferred tax asset of $13,464,000 during 2008.
 The recoverability of the deferred tax asset, which is primarily due to the future
deductability of goodwill, core deposit intangible and the allowance for loan losses, is
contingent upon future book income. The Corporation believes that future income will
support this deferred tax asset and believes that no valuation allowance is necessary.
 25




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##### Table of Contents



H.
    
    Income Taxes (cont)
 There were no unrecognized tax benefits at December 31, 2008, and the Corporation does not
expect the total amount of unrecognized tax benefits to significantly increase or decrease
in the next twelve months.
 Effective tax rates differ from the federal statutory rate of 34% applied to income before
income taxes due to the following:
 6/30/09
    
    12/31/08Federal income tax rate
    
    
    34
    %
    
    
    34
    %Effect of capital loss carryforward
valuation allowance
    
    
    
    %
    
    
    
    %Other, net
    
    
    
    %
    
    
    
    %Effective tax rate
    
    
    34
    %
    
    
    34
    %
 The Corporation is no longer subject to examination by the Internal Revenue Service for
years before 2007. As of June 30, 2009, the Corporation had approximately $4,400,000 of
federal tax loss carryforward available to offset future federal income tax, which will
begin to expire in 2029.
 I.
    
    Subsequent Events
 Subsequent events have been evaluated through August 14, 2009, which is the date the
financial statements were available to be issued.
 26




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27




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##### Table of Contents



Company Overview
        Date Formed
    
    Name
    
    Services OfferedAugust 1997
    
    Community Bank Insurance Agency, Inc.
    
    Limited insurance related activitiesMarch 2002
    
    Community Bank Audit Services, Inc.
    
    Internal auditing and compliance
services for financial institutions
  28




---



##### Table of Contents



Date Opened
    
    Location
    
    Type of officeFebruary 1994
    
    22290 Michigan Avenue
    
    Full service retail branch with ATMDearborn, Michigan 48123
    
    Regional lending centerDecember 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 48076April 2007
    
    7755 23 Mile Road
    
    Full service retail branch with ATMShelby Township, MI 48075
  29




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30




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##### Table of Contents



Results of Operations
  Net Interest Income
 2009 Compared to 2008.
 Average Balances, Interest Rates and Yields.
 31




---



##### Table of Contents



Three months ended June 30, 2009
    
    
    Three months ended June 30, 2008Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(In thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsInterest-bearing deposits with banks
    
    $
    51,839
    
    
    $
    103
    
    
    
    0.80
    %
    
    $
    206
    
    
    $
    1
    
    
    
    1.95
    %Federal funds sold
    
    
    8,026
    
    
    
    6
    
    
    
    0.30
    %
    
    
    4,802
    
    
    
    21
    
    
    
    2.75
    %Investment securities, available for sale
    
    
    46,310
    
    
    
    178
    
    
    
    1.54
    %
    
    
    12,838
    
    
    
    109
    
    
    
    3.41
    %Loans
    
    
    898,739
    
    
    
    13,286
    
    
    
    5.93
    %
    
    
    948,591
    
    
    
    14,994
    
    
    
    6.36
    %Sub-total earning assets
    
    
    1,004,914
    
    
    
    13,573
    
    
    
    5.42
    %
    
    
    966,437
    
    
    
    15,125
    
    
    
    6.29
    %Other assets
    
    
    62,037
    
    
    
    
    
    
    
    
    
    
    
    81,986Total assets
    
    $
    1,066,951
    
    
    
    
    
    
    
    
    
    
    $
    1,048,423Liabilities and stockholders equityInterest bearing deposits
    
    $
    816,083
    
    
    $
    5,458
    
    
    
    2.68
    %
    
    $
    723,733
    
    
    $
    5,874
    
    
    
    3.26
    %Other borrowings
    
    
    68,951
    
    
    
    578
    
    
    
    3.36
    %
    
    
    99,957
    
    
    
    967
    
    
    
    3.89
    %Sub-total interest bearing liabilities
    
    
    885,034
    
    
    
    6,036
    
    
    
    2.74
    %
    
    
    823,690
    
    
    
    6,841
    
    
    
    3.34
    %Non-interest bearing deposits
    
    
    82,304
    
    
    
    
    
    
    
    
    
    
    
    83,614Other liabilities
    
    
    2,159
    
    
    
    
    
    
    
    
    
    
    
    3,117Stockholders equity
    
    
    97,454
    
    
    
    
    
    
    
    
    
    
    
    138,002Total liabilities and stockholders equity
    
    $
    1,066,951
    
    
    
    
    
    
    
    
    
    
    $
    1,048,423Net interest income
    
    
    
    
    
    $
    7,537
    
    
    
    
    
    
    
    
    
    
    $
    8,284Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.68
    %
    
    
    
    
    
    
    
    
    
    
    2.95
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    3.01
    %
    
    
    
    
    
    
    
    
    
    
    3.45
    %
 32




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##### Table of Contents



Six months ended June 30, 2009
    
    
    Six months ended June 30, 2008Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(In thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsInterest-bearing deposits with banks
    
    $
    48,562
    
    
    $
    197
    
    
    
    0.82
    %
    
    $
    193
    
    
    $
    2
    
    
    
    2.08
    %Federal funds sold
    
    
    7,616
    
    
    
    12
    
    
    
    0.32
    %
    
    
    3,427
    
    
    
    36
    
    
    
    2.11
    %Investment securities, available for sale
    
    
    56,874
    
    
    
    434
    
    
    
    1.54
    %
    
    
    12,393
    
    
    
    218
    
    
    
    3.53
    %Loans
    
    
    909,413
    
    
    
    27,096
    
    
    
    6.01
    %
    
    
    948,000
    
    
    
    31,168
    
    
    
    6.59
    %Sub-total earning assets
    
    
    1,022,465
    
    
    
    27,739
    
    
    
    5.47
    %
    
    
    964,013
    
    
    
    31,424
    
    
    
    6.54
    %Other assets
    
    
    60,961
    
    
    
    
    
    
    
    
    
    
    
    82,192Total assets
    
    $
    1,083,426
    
    
    
    
    
    
    
    
    
    
    $
    1,046,205Liabilities and stockholders equityInterest bearing deposits
    
    $
    828,981
    
    
    $
    11,456
    
    
    
    2.79
    %
    
    $
    714,982
    
    
    $
    12,902
    
    
    
    3.62
    %Other borrowings
    
    
    71,127
    
    
    
    1,229
    
    
    
    3.48
    %
    
    
    106,275
    
    
    
    2,185
    
    
    
    4.12
    %Sub-total interest bearing liabilities
    
    
    900,108
    
    
    
    12,685
    
    
    
    2.84
    %
    
    
    821,257
    
    
    
    15,087
    
    
    
    3.68
    %Non-interest bearing deposits
    
    
    80,009
    
    
    
    
    
    
    
    
    
    
    
    83,233Other liabilities
    
    
    2,072
    
    
    
    
    
    
    
    
    
    
    
    3,674Stockholders equity
    
    
    101,237
    
    
    
    
    
    
    
    
    
    
    
    138,041Total liabilities and stockholders
equity
    
    $
    1,083,426
    
    
    
    
    
    
    
    
    
    
    $
    1,046,205Net interest income
    
    
    
    
    
    $
    15,054
    
    
    
    
    
    
    
    
    
    
    $
    16,337Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.63
    %
    
    
    
    
    
    
    
    
    
    
    2.86
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    2.97
    %
    
    
    
    
    
    
    
    
    
    
    3.40
    %
 Rate/Volume Analysis.
 33




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##### Table of Contents



Three and Six Months Ended June 30, 2009/2008Change 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
    
    $
    103
    
    
    $
    (1
    )
    
    $
    102
    
    
    $
    196
    
    
    $
    (1
    )
    
    $
    195Federal funds sold
    
    
    14
    
    
    
    (29
    )
    
    
    (15
    )
    
    
    7
    
    
    
    (31
    )
    
    
    (24
    )Investment securities, available for sale
    
    
    129
    
    
    
    (60
    )
    
    
    69
    
    
    
    336
    
    
    
    (120
    )
    
    
    216Loans
    
    
    (687
    )
    
    
    (1,021
    )
    
    
    (1,708
    )
    
    
    (1,316
    )
    
    
    (2,756
    )
    
    
    (4,072
    )Total earning assets
    
    $
    (441
    )
    
    $
    (1,111
    )
    
    $
    (1,552
    )
    
    $
    (777
    )
    
    $
    (2,908
    )
    
    $
    (3,685
    )LiabilitiesInterest bearing deposits
    
    $
    620
    
    
    
    (1,036
    )
    
    $
    (416
    )
    
    $
    1,529
    
    
    $
    (2,975
    )
    
    $
    (1,446
    )Other borrowings
    
    
    (257
    )
    
    
    (132
    )
    
    
    (389
    )
    
    
    (620
    )
    
    
    (336
    )
    
    
    (956
    )Total interest bearing liabilities
    
    $
    363
    
    
    $
    (1,168
    )
    
    $
    (805
    )
    
    $
    909
    
    
    $
    (3,311
    )
    
    $
    (2,402
    )Net interest income
    
    
    
    
    
    
    
    
    
    $
    (747
    )
    
    
    
    
    
    
    
    
    
    $
    (1,283
    )Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    (0.26
    %)
    
    
    
    
    
    
    
    
    
    
    (0.23
    %)Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    (0.44
    %)
    
    
    
    
    
    
    
    
    
    
    (0.43
    %)
 Provision for Loan Losses
 2009 Compared to 2008.
    34




---



##### Table of Contents



Non-interest Income (Loss)
 2009 Compared to 2008.
  Non-interest Expense
 2009 Compared to 2008.
  35




---



##### Table of Contents



Income Tax Provision
 2009 Compared to 2008.
 Comparison of Financial Condition at June 30, 2009 and December 31, 2008
 Assets.
 Federal Funds Sold.
 Interest bearing deposits with banks.
 Mortgage Loans Held for Sale.
 Securities  Available for Sale.
  Federal Home Loan Bank Stock.
 36




---



##### Table of Contents



Loans.
 06/30/09
    
    
    12/31/08
    
    
    06/30/08Consumer loans
    
    $
    30,270
    
    
    $
    31,864
    
    
    $
    33,206Commercial, financial, & other
    
    
    157,438
    
    
    
    164,740
    
    
    
    170,402Land development loans  residential property
    
    
    48,454
    
    
    
    54,323
    
    
    
    60,170Land development loans  non residential property
    
    
    13,405
    
    
    
    16,094
    
    
    
    21,000Commercial real estate construction  residential property
    
    
    13,125
    
    
    
    17,296
    
    
    
    20,605Commercial real estate construction  non residential
property
    
    
    22,518
    
    
    
    25,322
    
    
    
    35,087Commercial real estate mortgages
    
    
    549,275
    
    
    
    571,204
    
    
    
    549,145Residential real estate mortgages
    
    
    48,083
    
    
    
    52,426
    
    
    
    54,466882,568
    
    
    
    933,269
    
    
    
    944,081Allowance for loan losses
    
    
    (22,422
    )
    
    
    (14,452
    )
    
    
    (16,638
    )$
    860,146
    
    
    $
    918,817
    
    
    $
    927,443
  06/30/09
    
    
    12/31/08
    
    
    06/30/08Troubled debt restructuring
    
    
    46,714
    
    
    
    17,765
    
    
    
    13,145Over 90 days past due and still accruing
    
    
    
    
    
    
    450
    
    
    
    7,319Non-accrual loans
    
    
    57,610
    
    
    
    51,708
    
    
    
    36,195Total non-performing loans
    
    
    104,324
    
    
    
    69,923
    
    
    
    56,659Real estate owned
    
    
    13,046
    
    
    
    9,657
    
    
    
    5,411Real estate in redemption
    
    
    4,388
    
    
    
    
    
    
    
    Other repossessed assets
    
    
    
    
    
    
    
    
    
    
    Other non-performing assets
    
    
    17,434
    
    
    
    9,657
    
    
    
    5,411Total non-performing assets
    
    $
    121,758
    
    
    $
    79,580
    
    
    $
    62,070
  37




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##### Table of Contents



Number ofLoans
    
    
    BalanceConsumer loans
    
    
    16
    
    
    $
    1,039Commercial, financial, & other
    
    
    46
    
    
    
    6,921Land development loans  residential property
    
    
    18
    
    
    
    15,706Land development loans  non residential property
    
    
    2
    
    
    
    4,772Commercial real estate construction  residential property
    
    
    11
    
    
    
    5,077Commercial real estate construction  non residential property
    
    
    3
    
    
    
    6,182Commercial real estate mortgages
    
    
    40
    
    
    
    16,308Residential real estate mortgages
    
    
    13
    
    
    
    1,605Total non-accrual loans
    
    
    149
    
    
    $
    57,610
 Allowance for Loan Losses.
  38




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##### Table of Contents



Six Months
    
    
    
    
    
    
    Six MonthsEnded
    
    
    Year Ended
    
    
    Ended06/30/09
    
    
    12/31/08
    
    

06/30/08Balance, beginning of year
    
    $
    14,452
    
    
    $
    10,617
    
    
    $
    10,617Charge-offs:Consumer loans
    
    
    539
    
    
    
    318
    
    
    
    176Commercial, financial & other
    
    
    2,490
    
    
    
    4,304
    
    
    
    3,127Land development loans  residential property
    
    
    5,308
    
    
    
    1,777
    
    
    
    Land development loans  non residential property
    
    
    2,356
    
    
    
    
    
    
    
    Commercial real estate construction  residential property
    
    
    1,176
    
    
    
    1,635
    
    
    
    58Commercial real estate construction  non residential property
    
    
    430
    
    
    
    192
    
    
    
    Commercial real estate mortgages
    
    
    3,708
    
    
    
    2,446
    
    
    
    190Residential real estate mortgages
    
    
    621
    
    
    
    296
    
    
    
    106Recoveries:Consumer loans
    
    
    11
    
    
    
    19
    
    
    
    11Commercial, financial & other
    
    
    189
    
    
    
    117
    
    
    
    31Land development loans  residential property
    
    
    28
    
    
    
    33
    
    
    
    Land development loans  non residential property
    
    
    
    
    
    
    
    
    
    
    Commercial real estate construction  residential property
    
    
    
    
    
    
    0
    
    
    
    Commercial real estate construction  non residential property
    
    
    
    
    
    
    3
    
    
    
    Commercial real estate mortgages
    
    
    26
    
    
    
    21
    
    
    
    4Residential real estate mortgages
    
    
    7
    
    
    
    4
    
    
    
    Net charge-offs
    
    
    16,367
    
    
    
    10,771
    
    
    
    3,611Provision for loan losses
    
    
    24,337
    
    
    
    14,606
    
    
    
    9,632Balance, end of period
    
    $
    22,422
    
    
    $
    14,452
    
    
    $
    16,638Allowance to total loans
    
    
    2.54
    %
    
    
    1.55
    %
    
    
    1.76
    %
 Premises and Equipment.
 39




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##### Table of Contents



Other Real Estate.
 Number ofProperty Type
    
    Properties
    
    AmountSingle Family Homes
    
    
    36
    
    
    $
    4,598Condominium
    
    
    1
    
    
    
    1,001Vacant Land
    
    
    9
    
    
    
    4,562Commercial
    
    
    6
    
    
    
    4,574Office/Retail
    
    
    5
    
    
    
    2,699Total
    
    
    57
    
    
    $
    17,434
  Other intangible assets.
 GrossCarrying
    
    
    AccumulatedAmount
    
    
    AmortizationCore deposit intangible from acquisition of:Bank of Washtenaw
    
    $
    264
    
    
    $
    22Fidelity Financial Corporation of Michigan
    
    
    2,493
    
    
    
    208Total core deposit intangible
    
    $
    2,757
    
    
    $
    230Borrower relationship intangible from acquisition of :Bank of Washtenaw
    
    $
    318
    
    
    $
    29Fidelity Financial Corporation of Michigan
    
    
    1,517
    
    
    
    138Total borrower relationship intangible
    
    $
    1,835
    
    
    $
    167Total intangible assets
    
    $
    4,592
    
    
    $
    397
  40




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##### Table of Contents



Accrued Interest Receivable.
 Other Assets
 41




---



##### Table of Contents



Deposits.
 06/30/09
    
    
    12/31/08
    
    
    06/30/08Non-interest bearing:Demand
    
    $
    83,752
    
    
    $
    81,317
    
    
    $
    82,798Interest bearing:Checking
    
    $
    106,669
    
    
    $
    103,774
    
    
    $
    78,865Money market
    
    
    72,394
    
    
    
    163,611
    
    
    
    99,761Savings
    
    
    52,017
    
    
    
    54,164
    
    
    
    68,431Time, under $100,000
    
    
    221,980
    
    
    
    211,109
    
    
    
    187,628Time, $100,000 and over
    
    
    276,355
    
    
    
    324,420
    
    
    
    306,439729,415
    
    
    
    857,078
    
    
    
    741,124Total deposits
    
    $
    813,167
    
    
    $
    938,395
    
    
    $
    823,922
   06/30/09
    
    
    12/31/08
    
    
    06/30/08Interest bearing checking
    
    $
    2,577
    
    
    $
    4,283
    
    
    $
    1,728Time, $100,000 and over
    
    
    15,326
    
    
    
    38,999
    
    
    
    96,339Total municipal deposits
    
    $
    17,903
    
    
    $
    43,282
    
    
    $
    98,067
  42




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##### Table of Contents



Federal Funds Purchased
 Securities Sold Under Agreement to Repurchase
 Federal Home Loan Bank Advances
 Accrued Interest Payable
 Other Liabilities
 Subordinated Debentures .
 43




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##### Table of Contents



Capital
   MinimumTo Be Well CapitalizedMinimum for Capital
    
    Under Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of June 30, 2009Total capital(to risk weighted assets)Consolidated
    
    
    84,199
    
    
    
    9.17
    %
    
    
    73,490
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    82,088
    
    
    
    8.95
    %
    
    
    73,343
    
    
    
    8.00
    %
    
    
    91,679
    
    
    
    10.00
    %Tier 1 capital(to risk weighted assets)Consolidated
    
    
    72,604
    
    
    
    7.89
    %
    
    
    36,792
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    70,493
    
    
    
    7.69
    %
    
    
    36,672
    
    
    
    4.00
    %
    
    
    55,007
    
    
    
    6.00
    %Tier 1 capital(to average assets)Consolidated
    
    
    72,604
    
    
    
    6.96
    %
    
    
    41,733
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    70,493
    
    
    
    6.78
    %
    
    
    41,588
    
    
    
    4.00
    %
    
    
    51,985
    
    
    
    5.00
    %As of December 31, 2008Total capital(to risk weighted assets)Consolidated
    
    
    107,962
    
    
    
    10.69
    %
    
    
    80,832
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    105,568
    
    
    
    10.47
    %
    
    
    80,667
    
    
    
    8.00
    %
    
    
    100,834
    
    
    
    10.00
    %Tier 1 capital(to risk weighted assets)Consolidated
    
    
    95,310
    
    
    
    9.43
    %
    
    
    40,416
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    92,941
    
    
    
    9.22
    %
    
    
    40,334
    
    
    
    4.00
    %
    
    
    60,501
    
    
    
    6.00
    %Tier 1 capital(to average assets)Consolidated
    
    
    95,310
    
    
    
    8.88
    %
    
    
    42,933
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    92,941
    
    
    
    8.69
    %
    
    
    42,781
    
    
    
    4.00
    %
    
    
    53,476
    
    
    
    5.00
    %
   44




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##### Table of Contents



PART I    FINANCIAL INFORMATION
 
 ITEM 3.
    
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 Interest Rate Sensitivity Analysis.
   45




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##### Table of Contents



Interest Rate Sensitivity Period(In thousands)
    
    1-90
    
    
    91-365
    
    
    1-5
    
    
    OverDays
    
    
    Days
    
    
    Years
    
    
    5 Years
    
    
    TotalEarning assetsFederal funds sold
    
    $
    1,425
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,425Interest bearing deposits with Banks
    
    
    6,707
    
    
    
    6,749
    
    
    
    4,998
    
    
    
    
    
    
    
    18,454Mortgage loans held for sale
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60Securities available for sale
    
    
    1,000
    
    
    
    0
    
    
    
    2,257
    
    
    
    
    
    
    
    3,257Federal Home Loan Bank stock
    
    
    3,698
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,698Total loans, net of non-accrual
    
    
    190,765
    
    
    
    89,993
    
    
    
    505,908
    
    
    
    37,542
    
    
    
    824,208Total earning assets
    
    
    203,655
    
    
    
    96,742
    
    
    
    513,163
    
    
    
    37,542
    
    
    
    851,102Interest bearing liabilitiesTotal interest bearing deposits
    
    
    325,637
    
    
    
    374,546
    
    
    
    28,972
    
    
    
    260
    
    
    
    729,415Federal Home Loan Bank advances
    
    
    19,000
    
    
    
    25,000
    
    
    
    29,955
    
    
    
    
    
    
    
    73,955Other Borrowings
    
    
    2,206
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,206Subordinated debentures
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Total interest bearing liabilities
    
    
    356,843
    
    
    
    399,546
    
    
    
    58,927
    
    
    
    260
    
    
    
    815,576Net asset (liability) funding gap
    
    
    (153,188
    )
    
    
    (302,804
    )
    
    
    454,236
    
    
    
    37,282
    
    
    $
    35,526Cumulative net asset (liability) funding gap
    
    $
    (153,188
    )
    
    $
    (455,992
    )
    
    $
    (1,756
    )
    
    $
    35,526
 46




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##### Table of Contents



Liquidity.
     47




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##### Table of Contents



Payments Due By PeriodLess Than
    
    
    1-3
    
    
    3-5
    
    
    Over 51 Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    TotalSecurities sold under agreements to repurchase
    
    $
    2,206
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,206Certificates of deposit
    
    
    469,053
    
    
    
    28,199
    
    
    
    774
    
    
    
    309
    
    
    
    498,335Long-term borrowings
    
    
    44,000
    
    
    
    19,955
    
    
    
    10,000
    
    
    
    
    
    
    
    73,955Lease commitments
    
    
    677
    
    
    
    728
    
    
    
    12
    
    
    
    
    
    
    
    1,417Subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    10,000Totals
    
    $
    515,936
    
    
    $
    48,882
    
    
    $
    10,786
    
    
    $
    10,309
    
    
    $
    585,913
  Amount Of Commitment Expiration Per PeriodLess Than
    
    
    1-3
    
    
    3-5
    
    
    Over 51 Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    TotalUnused loan commitments
    
    $
    65,081
    
    
    $
    9,833
    
    
    $
    7,984
    
    
    $
    11,014
    
    
    $
    93,912Standby letters of credit
    
    
    994
    
    
    
    432
    
    
    
    2,000
    
    
    
    
    
    
    
    3,426Totals
    
    $
    66,075
    
    
    $
    10,265
    
    
    $
    9,984
    
    
    $
    11,014
    
    
    $
    97,338
 48




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##### Table of Contents



Item 4. Controls and Procedures
 Disclosure Controls and Procedures
 Internal Controls Over Financial Reporting
 49




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##### Table of Contents



PART II    OTHER INFORMATION
 
 ITEM 4.
    
    SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
  Nominee
    
    Total ForDavid Himick
    
    
    6,212,026Michael J. Ross
    
    
    6,413,584Robert C. Schwyn
    
    
    7,287,203
 
 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 April 21, 2009 was filed during the quarter ended June 30, 2009.
 50




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##### Table of Contents



SIGNATURES
  
 /s/ John E. DemmerJohn E. DemmerChairman
 /s/ Michael J. RossMichael J. RossPresident and Chief Executive Officer
 /s/ Jeffrey L. KarafaJeffrey L. KarafaTreasurer and Chief Financial Officer
  51