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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 September 30, 2008.
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission file number 000-24478.
 DEARBORN BANCORP, INC.
  Michigan
    
    38-3073622(State or other jurisdiction of
    
    (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
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ
  Class
    
    Shares OutstandingCommon Stock
    
    8,096,204




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##### 



PagePart I. Financial Information:Item 1. Financial StatementsThe following consolidated condensed financial statements of
Dearborn Bancorp, Inc. and its subsidiary included in this report are:Report of Independent Registered Public Accounting Firm
    
    
    3Consolidated Condensed Balance Sheets  September 30, 2008,
December 31, 2007 and September 30, 2007
    
    
    4Consolidated Condensed Statements of Operations  For the Three and
Nine Months Ended September 30, 2008 and 2007
    
    
    5Consolidated Condensed Statements of Comprehensive Income  For
the Three and Nine Months Ended September 30, 2008 and 2007
    
    
    6Consolidated Condensed Statements of Cash Flows  For the
Nine Months Ended September 30, 2008 and 2007
    
    
    7Notes to Consolidated Condensed Financial Statements
    
    
    9-20Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    21-38Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    39-42Item 4. Controls and Procedures
    
    
    43Part 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
    
    
    44Pursuant to SEC rules and regulations, the following items are omitted
from this Form 10-Q as inapplicable or to which the answer is negative:Item 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Changes in Securities and Use of ProceedsItem 3. Defaults upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationSIGNATURES
    
    
    45EX-31.1EX-31.2EX-32.1EX-32.2
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3




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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited)
  09/30/08
    
    
    12/31/07
    
    
    09/30/07ASSETSCash and cash equivalentsCash and due from banks
    
    $
    15,744
    
    
    $
    7,869
    
    
    $
    14,929Federal funds sold
    
    
    14,281
    
    
    
    1,495
    
    
    
    7,031Interest bearing deposits with banks
    
    
    33,146
    
    
    
    118
    
    
    
    100Total cash and cash equivalents
    
    
    63,171
    
    
    
    9,482
    
    
    
    22,060Mortgage loans held for sale
    
    
    281
    
    
    
    1,316
    
    
    
    384Investment securities, available for sale
    
    
    2,520
    
    
    
    8,902
    
    
    
    10,640Federal Home Loan Bank stock
    
    
    3,614
    
    
    
    2,072
    
    
    
    1,927LoansLoans
    
    
    939,626
    
    
    
    952,084
    
    
    
    945,622Allowance for loan loss
    
    
    (16,429
    )
    
    
    (10,617
    )
    
    
    (10,309
    )Net loans
    
    
    923,197
    
    
    
    941,467
    
    
    
    935,313Premises and equipment, net
    
    
    21,491
    
    
    
    22,782
    
    
    
    23,043Real estate owned
    
    
    8,343
    
    
    
    6,319
    
    
    
    3,338Goodwill
    
    
    34,028
    
    
    
    34,028
    
    
    
    34,028Other intangible assets
    
    
    10,165
    
    
    
    11,133
    
    
    
    11,551Accrued interest receivable
    
    
    3,601
    
    
    
    3,816
    
    
    
    4,258Other assets
    
    
    8,110
    
    
    
    5,664
    
    
    
    5,416Total assets
    
    $
    1,078,521
    
    
    $
    1,046,981
    
    
    $
    1,051,958LIABILITIESDepositsNon-interest bearing deposits
    
    $
    84,073
    
    
    $
    83,594
    
    
    $
    92,770Interest bearing deposits
    
    
    775,196
    
    
    
    739,033
    
    
    
    768,764Total deposits
    
    
    859,269
    
    
    
    822,627
    
    
    
    861,534Other liabilitiesFederal funds purchased
    
    
    
    
    
    
    30,100
    
    
    
    Securities sold under agreements to repurchase
    
    
    222
    
    
    
    480
    
    
    
    491Federal Home Loan Bank advances
    
    
    72,283
    
    
    
    41,370
    
    
    
    36,429Accrued interest payable
    
    
    1,734
    
    
    
    3,168
    
    
    
    619Other liabilities
    
    
    1,173
    
    
    
    1,688
    
    
    
    3,361Subordinated debentures
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000Total liabilities
    
    
    944,681
    
    
    
    909,433
    
    
    
    912,434STOCKHOLDERS EQUITYCommon stock - 20,000,000 shares authorized,
8,098,557 shares at 09/30/08, 8,222,413 shares at
12/31/07; and 8,471,913 shares at 09/30/07
    
    
    133,099
    
    
    
    134,278
    
    
    
    137,837Retained earnings
    
    
    732
    
    
    
    3,250
    
    
    
    1,675Accumulated other comprehensive loss
    
    
    9
    
    
    
    20
    
    
    
    12Total stockholders equity
    
    
    133,840
    
    
    
    137,548
    
    
    
    139,524Total liabilities and stockholders equity
    
    $
    1,078,521
    
    
    $
    1,046,981
    
    
    $
    1,051,958
  4




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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (unaudited)
  Three Months Ended
    
    
    Nine Months Ended09/30/08
    
    
    09/30/07
    
    
    09/30/08
    
    
    09/30/07Interest incomeInterest on loans, including fees
    
    $
    14,742
    
    
    $
    17,565
    
    
    $
    45,910
    
    
    $
    51,949Interest on securities, available for sale
    
    
    97
    
    
    
    160
    
    
    
    315
    
    
    
    501Interest on federal funds
    
    
    22
    
    
    
    84
    
    
    
    59
    
    
    
    361Interest on deposits with banks
    
    
    2
    
    
    
    42
    
    
    
    3
    
    
    
    84Total interest income
    
    
    14,863
    
    
    
    17,851
    
    
    
    46,287
    
    
    
    52,895Interest expenseInterest on deposits
    
    
    5,764
    
    
    
    8,663
    
    
    
    18,666
    
    
    
    24,687Interest on other borrowings
    
    
    709
    
    
    
    497
    
    
    
    2,514
    
    
    
    1,808Interest on subordinated debentures
    
    
    140
    
    
    
    190
    
    
    
    520
    
    
    
    655Total interest expense
    
    
    6,613
    
    
    
    9,350
    
    
    
    21,700
    
    
    
    27,150Net interest income
    
    
    8,250
    
    
    
    8,501
    
    
    
    24,587
    
    
    
    25,745Provision for loan losses
    
    
    90
    
    
    
    4,060
    
    
    
    9,722
    
    
    
    4,966Net interest income after provision for loan losses
    
    
    8,160
    
    
    
    4,441
    
    
    
    14,865
    
    
    
    20,779Non-interest incomeService charges on deposit accounts
    
    
    403
    
    
    
    290
    
    
    
    1,146
    
    
    
    939Fees for other services to customers
    
    
    23
    
    
    
    29
    
    
    
    89
    
    
    
    98Gain on the sale of loans
    
    
    61
    
    
    
    34
    
    
    
    165
    
    
    
    135Write-down of real estate
    
    
    (209
    )
    
    
    (496
    )
    
    
    (509
    )
    
    
    (596
    )Loss on the sale of real estate
    
    
    (16
    )
    
    
    
    
    
    
    (720
    )
    
    
    Gain on the sale of securities, available for sale
    
    
    9
    
    
    
    
    
    
    
    9
    
    
    
    Other income
    
    
    48
    
    
    
    39
    
    
    
    195
    
    
    
    122Total non-interest income
    
    
    319
    
    
    
    (104
    )
    
    
    375
    
    
    
    698Non-interest expensesSalaries and employee benefits
    
    
    3,413
    
    
    
    3,137
    
    
    
    9,906
    
    
    
    9,791Occupancy and equipment expense
    
    
    908
    
    
    
    903
    
    
    
    2,771
    
    
    
    2,748Intangible expense
    
    
    323
    
    
    
    240
    
    
    
    968
    
    
    
    912Advertising and marketing
    
    
    138
    
    
    
    119
    
    
    
    392
    
    
    
    339Stationery and supplies
    
    
    103
    
    
    
    124
    
    
    
    407
    
    
    
    480Professional services
    
    
    241
    
    
    
    301
    
    
    
    726
    
    
    
    787Data processing
    
    
    145
    
    
    
    114
    
    
    
    602
    
    
    
    442Defaulted loan expense
    
    
    483
    
    
    
    (7
    )
    
    
    1,429
    
    
    
    223Other operating expenses
    
    
    558
    
    
    
    560
    
    
    
    1,777
    
    
    
    1,335Total non-interest expenses
    
    
    6,312
    
    
    
    5,491
    
    
    
    18,978
    
    
    
    17,057Income (Loss) before income tax provision
    
    
    2,167
    
    
    
    (1,154
    )
    
    
    (3,738
    )
    
    
    4,420Income tax provision (benefit)
    
    
    747
    
    
    
    (299
    )
    
    
    (1,220
    )
    
    
    1,652Net income (loss)
    
    $
    1,420
    
    
    $
    (855
    )
    
    $
    (2,518
    )
    
    $
    2,768Per share data:Net income  basic
    
    $
    0.18
    
    
    $
    (0.10
    )
    
    $
    (0.31
    )
    
    $
    0.32Net income  diluted
    
    $
    0.18
    
    
    $
    (0.10
    )
    
    $
    (0.31
    )
    
    $
    0.31Weighted average number of shares outstanding  basic
    
    
    8,044,180
    
    
    
    8,510,207
    
    
    
    8,078,188
    
    
    
    8,692,562Weighted average number of shares outstanding  diluted
    
    
    8,082,263
    
    
    
    8,510,207
    
    
    
    8,078,188
    
    
    
    8,935,941
  5




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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
  Three Months Ended
    
    
    Nine Months Ended09/30/08
    
    
    09/30/07
    
    
    09/30/08
    
    
    09/30/07Net income (loss)
    
    $
    1,420
    
    
    $
    (855
    )
    
    $
    (2,518
    )
    
    $
    2,768Other comprehensive income (loss), net of taxUnrealized gains (losses) on securitiesUnrealized holding gains (losses) arising during
during period
    
    
    (13
    )
    
    
    15
    
    
    
    (26
    )
    
    
    25Less: reclassification adjustment for gains
Included in net income
    
    
    9
    
    
    
    
    
    
    
    9
    
    
    
    Tax effects
    
    
    1
    
    
    
    (5
    )
    
    
    6
    
    
    
    (7
    )Other comprehensive income/(loss)
    
    
    (3
    )
    
    
    10
    
    
    
    (11
    )
    
    
    18Comprehensive income (loss)
    
    $
    1,417
    
    
    $
    (845
    )
    
    $
    (2,529
    )
    
    $
    2,786
  6




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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
  Nine Months Ended9/30/2008
    
    
    9/30/2007Cash flows from operating activitiesInterest and fees received
    
    $
    46,502
    
    
    $
    51,974Interest paid
    
    
    (23,134
    )
    
    
    (27,523
    )Proceeds from sale of mortgages held for sale
    
    
    17,158
    
    
    
    16,365Origination of mortgages held for sale
    
    
    (15,861
    )
    
    
    (14,791
    )Taxes paid
    
    
    (181
    )
    
    
    (3,322
    )Cash paid to suppliers and employees
    
    
    (16,450
    )
    
    
    (18,803
    )Net cash provided by operating activities
    
    
    8,034
    
    
    
    3,900Cash flows from investing activitiesProceeds from the sale of securities available for sale
    
    
    5,827
    
    
    
    18,007Proceeds from calls, maturities and repayments of
of securities available for sale
    
    
    10,803
    
    
    
    6,657Purchases of securities available for sale
    
    
    (10,157
    )
    
    
    (29,198
    )Purchase of Federal Home Loan Bank stock
    
    
    (1,542
    )
    
    
    (639
    )Proceeds from the sale of real estate owned
    
    
    5,137
    
    
    
    Increase in loans, net of payments received
    
    
    65
    
    
    
    (13,785
    )Purchases of property and equipment
    
    
    (404
    )
    
    
    (5,108
    )Net cash paid in Fidelity acquisition
    
    
    
    
    
    
    (32,122
    )Net cash used in investing activities
    
    
    9,729
    
    
    
    (56,188
    )Cash flows from financing activitiesNet increase (decrease) in non-interest bearing deposits
    
    
    479
    
    
    
    (6,303
    )Net increase in interest bearing deposits
    
    
    36,163
    
    
    
    47,074Decrease in other borrowings
    
    
    (258
    )
    
    
    (128
    )Net decrease in federal funds payable
    
    
    (30,100
    )
    
    
    (37,300
    )Proceeds from Federal Home Loan Bank advances
    
    
    30,913
    
    
    
    9,101Purchase of common stock
    
    
    (1,271
    )
    
    
    (8,411
    )Exercise of stock options
    
    
    
    
    
    
    62Tax benefit of stock options exercised
    
    
    
    
    
    
    223Net cash provided by financing activities
    
    
    35,926
    
    
    
    4,318Increase (decrease) in cash and cash equivalents
    
    
    53,689
    
    
    
    (47,970
    )Cash and cash equivalents at the beginning of the period
    
    
    9,482
    
    
    
    70,030Cash and cash equivalents at the end of the period
    
    $
    63,171
    
    
    $
    22,060
  7




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DEARBORN BANCORP, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
  Nine Months Ended9/30/2008
    
    
    9/30/2007Reconciliation of net income to net cash provided by operating activitiesNet income
    
    $
    (2,518
    )
    
    $
    2,768Adjustments to reconcile net income to net cashprovided by operating activitiesProvision for loan losses
    
    
    9,722
    
    
    
    4,966Depreciation and amortization expense
    
    
    1,011
    
    
    
    1,070Restricted stock award expense
    
    
    40
    
    
    
    (84
    )Stock option expense
    
    
    52
    
    
    
    (36
    )Accretion of discount on investment securities
    
    
    (119
    )
    
    
    (202
    )Amortization of premium on investment securities
    
    
    11
    
    
    
    1Writedown of other real estate owned
    
    
    1,322
    
    
    
    596Amortization of intangible assets
    
    
    968
    
    
    
    911Decrease in mortgages held for sale
    
    
    1,035
    
    
    
    1,439Decrease in interest receivable
    
    
    215
    
    
    
    323Decrease in interest payable
    
    
    (1,434
    )
    
    
    (5,286
    )Increase in other assets
    
    
    (1,756
    )
    
    
    (710
    )Decrease in other liabilities
    
    
    (515
    )
    
    
    (1,856
    )Net cash provided by operating activities
    
    $
    8,034
    
    
    $
    3,900Supplemental noncash disclosures:Transfers from loans to real estate owned
    
    $
    8,483
    
    
    $
    3,911Noncash investing activities:Fidelity Bank acquisition:Loans acquired
    
    
    
    
    
    
    178,052Bank premises and equipment
    
    
    
    
    
    
    9,214Acquisition intangibles recorded
    
    
    
    
    
    
    38,977Other assets acquired
    
    
    
    
    
    
    2,194Deposits assumed
    
    
    
    
    
    
    (187,635
    )Borrowings assumed
    
    
    
    
    
    
    (1,767
    )Other liabilities assumed
    
    
    
    
    
    
    (2,299
    )$
    36,736
  8




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A.
    
    Accounting and Reporting PoliciesThe consolidated condensed financial statements of Dearborn Bancorp, Inc. (the
Corporation) include the consolidation of its only subsidiary, Fidelity Bank (the
Bank). The accounting and reporting policies of the Corporation are in accordance with
accounting principles generally accepted in the United States of America and conform to
practice within the banking industry.The consolidated condensed financial statements of the Corporation as of September 30, 2008
and 2007, and December 31, 2007 and for the three and nine month periods ended September
30, 2008 and 2007 reflect all adjustments, consisting of normal recurring items which are
in the opinion of management, necessary for a fair presentation of the results for the
interim period. The consolidated condensed balance sheet of the Corporation as of December
31, 2007 has been derived from the audited consolidated balance sheet as of that date. The
operating results for the three and nine month periods ended September 30, 2008 are not
necessarily indicative of results of operations for the entire year.The consolidated condensed financial statements as of September 30, 2008 and 2007, and for
the three and nine months ended September 30, 2008 and 2007 included herein have been
prepared by the Corporation, without an audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures normally
included in interim financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations. These financial statements should be read in conjunction
with the financial statements and notes thereon included in the Corporations 2007 Annual
Report to Stockholders on Form 10-K.Certain of the Corporations accounting policies are important to the portrayal of the
Corporations financial condition, since they require management to make difficult, complex
or subjective judgments, some of which may relate to matters that are inherently uncertain.
Estimates associated with these policies are susceptible to material changes as a result
of changes in facts and circumstances. Facts and circumstances which could affect these
material judgments include, but without limitation, changes in interest rates, in the
performance of the economy or in the financial condition of borrowers. Management believes
that its critical accounting policies include determining the allowance for loan losses and
determining the fair value of securities and other financial instruments and assessing
other than temporary impairments of securities.
 9




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A.
    
    Accounting and Reporting Policies (cont)Income Per ShareBasic income per share is net income divided by the weighted average number of common shares
outstanding during the period. Diluted income per share includes the dilutive effect of
additional potential common shares issuable under stock options. Income per share is
restated for all stock splits and dividends through the date of issue of the financial
statements.Factors in the basic and diluted income per share calculation follow (in thousands, except
share and per share data):
 Three Months Ended
    
    
    Nine Months Ended9/30/2008
    
    
    9/30/2007
    
    
    9/30/2008
    
    
    9/30/2007BasicNet income
    
    $
    1,420
    
    
    $
    (855
    )
    
    $
    (2,518
    )
    
    $
    2,768Weighted average common shares
    
    
    8,044,180
    
    
    
    8,510,207
    
    
    
    8,078,188
    
    
    
    8,692,562Basic earnings per common share
    
    $
    0.18
    
    
    $
    (0.10
    )
    
    $
    (0.31
    )
    
    $
    0.32DilutedNet income
    
    $
    1,420
    
    
    $
    (855
    )
    
    $
    (2,518
    )
    
    $
    2,768Weighted average common shares
outstanding for basic earnings per
common share
    
    
    8,044,180
    
    
    
    8,510,207
    
    
    
    8,078,188
    
    
    
    8,692,562Add: Dilutive effects of assumed
exercise of stock options
    
    
    38,083
    
    
    
    
    
    
    
    
    
    
    
    243,379Average shares and dilutive potential
common shares
    
    
    8,082,263
    
    
    
    8,510,207
    
    
    
    8,078,188
    
    
    
    8,935,941Dilutive earnings per common share
    
    $
    0.18
    
    
    $
    (0.10
    )
    
    $
    (0.31
    )
    
    $
    0.31
  10




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##### Table of Contents



A.
    
    Accounting and Reporting Policies (cont)Effect of Newly Issued Accounting StandardsIn September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This
statement defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. This Statement establishes a fair value
hierarchy about the assumptions used to measure fair value and clarifies assumptions about
risk and the effect of a restriction on the sale or use of an asset. The standard is
effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB
issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP
delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value on a recurring
basis (at least annually) to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years. The adoption of this statement did not have a material
impact on the Corporations consolidated financial statements.In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active. This FASB staff
position clarifies the application of SFAS No. 157 in a market that is not active and
provides an example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. This FASB staff
position became effective for the Corporation on October 10, 2008 and did not have a
material impact on the Corporations consolidated financial statements.In February 2006, FASB issued Statement No. 159, The Fair Value Option for Financial Assets
and Liabilities (SFAS 159). Adoption of SFAS 159 is required for January 1, 2008. This
statement allows, but does not require, companies to record certain assets and liabilities
at their fair value. The fair value determination is made at the instrument level, so
similar assets or liabilities could be partially accounted for using the historical cost
method, while other similar assets or liabilities are accounted for using the fair value
method. Changes in fair value are recorded through the income statement in subsequent
periods. The statement provides for a one time opportunity to transfer existing assets and
liabilities to fair value at the point of adoption with a cumulative effect adjustment
recorded against equity. After adoption, the election to report assets or liabilities at
fair value must be made at the point of their inception. The adoption of this statement did
not have a material impact on the Corporations consolidated financial statements.
 11




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##### Table of Contents



A.
    
    Accounting and Reporting Policies (cont)Future Accounting MattersFinancial Accounting Standards Board Statement No. 141 (SFAS 141R), Business Combinations
(Revised 2007), was issued in December 2007 and is effective January 1, 2009. SFAS 141R
replaces SFAS 141 which applies to all transactions and other events in which one entity
obtains control over one or more other businesses. SFAS 141R requires an acquirer, upon
initially obtaining control of another entity, to recognize the assets, liabilities and any
non-controlling interest in the acquiree at fair value as of the acquisition date.
Contingent consideration is required to be recognized and measured at fair value on the date
of acquisition rather than at a later date when the amount of that consideration may be
determinable beyond a reasonable doubt. This fair value approach replaces the cost
allocation process required under SFAS 141 whereby the cost of an acquisition was allocated
to the individual asset acquired and liabilities assumed based on their estimated fair
value. SFAS 141R requires acquirers to expense acquisition-related costs as incurred rather
than allocating such costs to the assets acquired and liabilities assumed.Under SFAS 141R, the requirements of SFAS 146, Accounting for Costs Associated with Exit or
Disposal Activities, would have to be met in order to accrue for a restructuring plan in
purchase accounting. Pre-acquisition contingencies are to be recognized at fair value,
unless it is a non-contractual contingency that is not likely to materialize, in which case,
nothing should be recognized in purchase accounting. Instead, that contingency would be
subject to the probable and estimable recognition criteria under SFAS 5, Accounting for
Contingencies. SFAS 141R is not expected to have a significant impact on the Corporations
financial condition or results of operations.Financial Accounting Standards Board Statement No. 160 (SFAS 160), Noncontrolling Interest
in Consolidated Financial Statements, an amendment of ARB Statement No. 51,was issued in
December 2007 and establishes accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies
that a non-controlling interest in a subsidiary, which is sometimes referred to as a
minority interest, is an ownership interest in the consolidated entity that should be
reported as a component of equity in the consolidated financial statements. Among other
requirements, SFAS 160 requires consolidated net income to be reported at amounts that are
attributable to both the parent and the non-controlling interest. It also requires
disclosure, on the face of the consolidated income statement, of the amounts of consolidated
net income attributable to the parent and to the non-controlling interest. SFAS 160 is
effective for the Corporation on January 1, 2009 and is not expected to have a significant
impact on the Corporations financial statements.
 12




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##### Table of Contents



A.
    
    Accounting and Reporting Policies (cont)Financial Accounting Standards Board Statement No. 161 (SFAS 161), "Disclosures About
Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133,was
issued in March 2008 and amends and expands the disclosure requirements of SFAS 133 to
provide greater transparency about (i) how and why an entity uses derivative instruments,
(ii) how derivative instruments and related hedge items are accounted for under SFAS 133 and
its related interpretations, and (iii) how derivative instruments and related hedged items
affect an entitys financial position, results of operations and cash flows. To meet those
objectives, SFAS 161 requires qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of gains and losses on
derivative instruments and disclosures about credit-risk-related contingent features in
derivative agreements. SFAS 161 is effective for the Corporation on January 1, 2009 and is
not expected to have a significant impact on the Corporations financial statements.
 B.
    
    Securities Available For SaleThe amortized cost and fair value of securities available for sale are as follows (in
thousands):
 September 30, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueUS Government sponsored
equity securities
    
    $
    1,001
    
    
    $
    2
    
    
    $
    
    
    
    $
    1,003Municipal securities
    
    
    1,304
    
    
    
    18
    
    
    
    (12
    )
    
    
    1,310Mortgage backed securities
    
    
    202
    
    
    
    5
    
    
    
    
    
    
    
    207Totals
    
    $
    2,507
    
    
    $
    25
    
    
    $
    (12
    )
    
    $
    2,520
 December 31, 2007Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueUS Treasury securities
    
    $
    6,800
    
    
    $
    15
    
    
    $
    (10
    )
    
    $
    6,805US Government sponsored
equity securities
    
    
    1,009
    
    
    
    4
    
    
    
    
    
    
    
    1,013Municipal securities
    
    
    758
    
    
    
    16
    
    
    
    
    
    
    
    774Mortgage backed securities
    
    
    305
    
    
    
    5
    
    
    
    
    
    
    
    310Totals
    
    $
    8,872
    
    
    $
    40
    
    
    $
    (10
    )
    
    $
    8,902
 13




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##### Table of Contents



B.
    
    Securities Available for Sale (cont)The amortized cost and fair value of securities available for sale at September 30, 2008 by
contractual maturity are shown below (in thousands):
 Amortized
    
    
    FairCost
    
    
    ValueDue in less than one year
    
    $
    1,001
    
    
    $
    1,003Due in one year through five years
    
    
    1,023
    
    
    
    1,036Due in greater than five years
    
    
    281
    
    
    
    274Mortgage backed securities
    
    
    202
    
    
    
    207Totals
    
    $
    2,507
    
    
    $
    2,520
  Fair
    
    
    UnrealizedValue
    
    
    LossMunicipal securities
    
    $
    535
    
    
    $
    (12
    )Total temporarily impaired
    
    $
    535
    
    
    $
    (12
    )
   14




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##### Table of Contents



C.
    
    LoansThe aggregate balance in impaired loans are as follows (in thousands):
 09/30/08
    
    
    12/31/07
    
    
    09/30/07Impaired loans with no allocated allowance for loan
losses
    
    $
    35,771
    
    
    $
    27,817
    
    
    $
    21,614Impaired loans with allocated allowance for loan losses
    
    
    46,471
    
    
    
    10,816
    
    
    
    9,671Total
    
    $
    82,242
    
    
    $
    38,633
    
    
    $
    31,285Amount of the allowance for loan loss allocated
    
    $
    8,541
    
    
    $
    879
    
    
    $
    1,225
 D.
    
    GoodwillGoodwill is reviewed annually for impairment, as well as on an interim basis if events or
changes indicate that the asset might be impaired. During the second quarter of 2008, the
Corporation performed an interim impairment test due to the downturn in the economic
environment. For purposes of testing goodwill for impairment, the Corporation used the
income and market approaches. The income approach consisted of discounting projected future
cash flows, which were derived from internal forecasts and economic expectations. The
projected future cash flows were discounted using cost of capital metrics for the
Corporations peer group. The market approach applied a market multiple, based on observed
purchase transactions and price/earnings of the Corporations peer group, to the last
twelve-months of net income before income taxes, depreciation and amortization. As our
market capitalization declined and the financial sector volatility increased, management
focused on using valuation methods that were more representative of a market participants
view. Therefore, a combination of each valuation approach was applicable in determining the
fair value of the entity by appropriately weighting discounted future cash flows and the
market value approach. The Corporation will be completing its annual goodwill impairment
test as of November 30, 2008.
 15




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##### Table of Contents



E.
    
    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 738,729 shares. Exercise price is the market price at date of grant. The maximum
option term is ten years, and options vest fully after six months from the date of grant.A summary of the option activity in the 1994 Plan follows:
 WeightedAvailable
    
    
    
    
    
    
    Averagefor
    
    
    Options
    
    
    ExerciseGrant
    
    
    Outstanding
    
    
    PriceOutstanding at January 1, 2008
    
    
    
    
    
    
    453,682
    
    
    $
    8.29Forfeited
    
    
    
    
    
    
    (79,293
    )
    
    
    6.52Outstanding at September 30, 2008
    
    
    
    
    
    
    374,389
    
    
    $
    8.66
    16




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##### Table of Contents



E.
    
    Incentive Stock Plans (cont)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 September 30, 2008, there were 205,662 stock options outstanding with a
weighted average exercise price of $5.89. At September 30, 2008, 67,877 stock options were
vested fully. On June 30, 2009, the 17,785 stock options are scheduled to vest fully.
Stock option activity during the period is listed below:
 WeightedAverageNumber
    
    
    Exerciseof Shares
    
    
    PriceOutstanding at December 31, 2007
    
    
    35,251
    
    
    $
    13.06Stock Options Granted
    
    
    179,144
    
    
    $
    4.83Stock Options Forfeited
    
    
    (8,733
    )
    
    $
    13.06Outstanding at September 30, 2008
    
    
    205,662
    
    
    $
    5.89Options exercisable
    
    
    67,877
   Number
    
    
    Modification Dateof Shares
    
    
    Value per ShareOutstanding at December 31, 2007
    
    
    23,956
    
    
    $
    13.06Restricted Shares Forfeited
    
    
    (7,239
    )Restricted Shares Transferred to Common Shares
    
    
    (6,231
    )Restricted Shares Granted
    
    
    43,883Outstanding at September 30, 2008
    
    
    54,369
  17




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##### Table of Contents



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
similar assets or liabilities; quoted prices in markets that are not active; or other inputs
that are observable or can be corroborated by observable market data for substantially the
full term of the assets or liabilitiesLevel 3  Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities
  Securities available for sale
   Quoted Prices in
    
    Significant Other
    
    SignificantActive Markets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    InputsFair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Securities, available for sale
    
    $
    2,520
    
    
    $
    
    
    
    $
    2,520
    
    
    $
    
 18




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##### Table of Contents



F.
    
    Fair Value of Assets and Liabilities ( cont)Impaired LoansLoan impairment is reported when full payment under the loan terms is not expected.
Impaired loans are carried at the present value of estimated future cash flows using the
loans existing rate, or the fair value of collateral if the loan is collateral dependent.
A portion of the allowance for loan losses is allocated to impaired loans if the value of
such loans is deemed to be less than the unpaid balance. If these allocations cause the
allowance for loan losses to increase, such increase is reported as a component of the
provision for loan losses. Loan losses are charged against the allowance when management
believes the uncollectability of the loan is confirmed. During the nine month period ended
September 30, 2008, certain impaired loans were partially charged-off or re-evaluated. This
valuation would be considered Level 3, consisting of appraisals of underlying collateral and
discounted cash flow analysis.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 September 30, 2008 (in thousands):
 Quoted Prices in
    
    Significant Other
    
    SignificantActive Markets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    InputsFair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Loans
    
    $
    38,384
    
    
    $
    
    
    
    $
    
    
    
    $
    38,384
 19




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##### Table of Contents



G.
    
    Subsequent EventIn response to the financial crisis affecting the banking system and financial markets and
going concern threats to investment banks and other financial institutions, on October 3,
2008, the Emergency Economic Stabilization Act of 2008 (the EESA) was signed into law.
Pursuant to the EESA, the U.S. Treasury will have the authority to, among other things,
purchase up to $700 billion of mortgages, mortgage-backed securities and certain other
financial instruments from financial institutions for the purpose of stabilizing and
providing liquidity to the U.S. financial markets.On October 14, 2008, Secretary Paulson, after consulting with the Federal Reserve and the
FDIC, announced that the Department of the Treasury will purchase equity stakes in a wide
variety of banks and thrifts. Under this program, known as the Troubled Asset Relief
Program Capital Purchase Program (the TARP Capital Purchase Program), from the
$700 billion authorized by the EESA, the Treasury will make $250 billion of capital
available to U.S. financial institutions in the form of preferred stock. In conjunction with
the purchase of preferred stock, the Treasury will receive warrants to purchase common stock
with an aggregate market price equal to 15% of the preferred investment. Participating
financial institutions will be required to adopt the Treasurys standards for executive
compensation and corporate governance for the period during which the Treasury holds equity
issued under the TARP Capital Purchase Program. The Corporation expects to apply for the
TARP Capital Purchase Program.Also on October 14, 2008, after receiving a recommendation from the boards of the FDIC and
the Federal Reserve, and consulting with the President, Secretary Paulson signed the
systemic risk exception to the FDIC Act, enabling the FDIC to temporarily provide a 100%
guarantee of deposits in non-interest bearing transaction deposit accounts under a Temporary
Liquidity Guarantee Program. Coverage under the Temporary Liquidity Guarantee Program is
available for 30 days without charge and thereafter at a cost of 10 basis points per annum
for non-interest bearing transaction deposits. The Corporation will participate in the
Temporary Liquidity Guarantee Program as it relates to non-interest bearing transaction
deposit accounts.
 20




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##### Table of Contents



PART I    FINANCIAL INFORMATION
 
     21




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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
  22




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##### Table of Contents



Date Opened
    
    Location
    
    Type of officeFebruary 1994
    
    22290 Michigan Avenue 
Dearborn, Michigan 48123
    
    Full service retail branch with ATM
Regional lending centerDecember 1995
    
    24935 West Warren Avenue 
Dearborn Heights, Michigan 48127
    
    Full service retail branchAugust 1997
    
    44623 Five Mile Road
Plymouth, Michigan 48170
    
    Full service retail branch with ATMMay 2001
    
    1325 North Canton Center Road 
Canton, Michigan 48187
    
    Full service retail branch with ATMDecember 2001
    
    45000 River Ridge Drive 
Clinton Township, Michigan 48038
    
    Regional lending centerNovember 2002
    
    19100 Hall Road 
Clinton Township, Michigan 48038
    
    Full service retail branch with ATMFebruary 2003
    
    12820 Fort Street 
Southgate, Michigan 48195
    
    Full service retail branch with ATMMay 2003
    
    3201 University Drive, Suite 180
Auburn Hills, Michigan 48326
    
    Full service retail branchOctober 2004
    
    450 East Michigan Avenue
Saline, MI 48176
    
    Full service retail branch with ATMOctober 2004
    
    250 West Eisenhower Parkway 
Ann Arbor, MI 48103
    
    Full service retail branch with ATM
Regional lending certerOctober 2004
    
    2180 West Stadium Blvd. 
Ann Arbor, MI 48103
    
    Full service retail branch with ATMDecember 2004
    
    1360 Porter Street
Dearborn, MI 48123
    
    Loan production office
Regional lending centerJanuary 2007
    
    1040 E. Maple 
Birmingham, MI 48009
    
    Full service retail branch with ATM
Regional lending certerJanuary 2007
    
    3681 W. Maple
Birmingham, MI 48301
    
    Full service retail branch with ATMJanuary 2007
    
    30700 Telegraph 
Bingham Farms, MI 48025
    
    Full service retail branch with ATMJanuary 2007
    
    20000 Twelve Mile Road
Southfield, MI 48076
    
    Full service retail branch with ATMJanuary 2007
    
    26555 Evergreen
Southfield, MI 48076
    
    Full service retail branch with ATMJanuary 2007
    
    200 Galleria Officenter
Southfield, MI 48034
    
    Full service retail branch with ATMApril 2007
    
    7755 23 Mile Road
Shelby Township, MI 48075
    
    Full service retail branch with ATM
 23




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##### Table of Contents



24




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##### Table of Contents



Results of Operations
    Net Interest Income
 2008 Compared to 2007.
 Average Balances, Interest Rates and Yields.
 25




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##### Table of Contents



Three months ended September 30, 
2008
    
    
    Three months ended September 30, 
2007Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(In thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsInterest-bearing deposits with banks
    
    $
    1,227
    
    
    $
    2
    
    
    
    0.65
    %
    
    $
    3,553
    
    
    $
    42
    
    
    
    4.69
    %Federal funds sold
    
    
    4,482
    
    
    
    22
    
    
    
    1.95
    %
    
    
    6,983
    
    
    
    84
    
    
    
    4.77
    %Securities, available for sale
    
    
    11,389
    
    
    
    97
    
    
    
    3.39
    %
    
    
    12,672
    
    
    
    160
    
    
    
    5.01
    %Loans
    
    
    944,262
    
    
    
    14,742
    
    
    
    6.21
    %
    
    
    946,732
    
    
    
    17,565
    
    
    
    7.36
    %Sub-total earning assets
    
    
    961,360
    
    
    
    14,863
    
    
    
    6.15
    %
    
    
    969,940
    
    
    
    17,851
    
    
    
    7.30
    %Other assets
    
    
    80,792
    
    
    
    
    
    
    
    
    
    
    
    82,245Total assets
    
    $
    1,042,152
    
    
    
    
    
    
    
    
    
    
    $
    1,052,185Liabilities and stockholders equityInterest bearing deposits
    
    $
    738,640
    
    
    $
    5,764
    
    
    
    3.10
    %
    
    $
    759,712
    
    
    $
    8,663
    
    
    
    4.52
    %Other borrowings
    
    
    82,894
    
    
    
    849
    
    
    
    4.07
    %
    
    
    50,028
    
    
    
    687
    
    
    
    5.45
    %Sub-total interest bearing liabilities
    
    
    821,534
    
    
    
    6,613
    
    
    
    3.20
    %
    
    
    809,740
    
    
    
    9,350
    
    
    
    4.58
    %Non-interest bearing deposits
    
    
    83,784
    
    
    
    
    
    
    
    
    
    
    
    95,247Other liabilities
    
    
    2,885
    
    
    
    
    
    
    
    
    
    
    
    4,094Stockholders equity
    
    
    133,949
    
    
    
    
    
    
    
    
    
    
    
    143,104Total liabilities and stockholders
equity
    
    $
    1,042,152
    
    
    
    
    
    
    
    
    
    
    $
    1,052,185Net interest income
    
    
    
    
    
    $
    8,250
    
    
    
    
    
    
    
    
    
    
    $
    8,501Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.95
    %
    
    
    
    
    
    
    
    
    
    
    2.72
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    3.41
    %
    
    
    
    
    
    
    
    
    
    
    3.48
    %
 26




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##### Table of Contents



Nine months ended September 30, 
2008
    
    
    Nine months ended September 30, 
2007Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(In thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsInterest-bearing deposits with banks
    
    $
    540
    
    
    $
    3
    
    
    
    0.74
    %
    
    $
    2,479
    
    
    $
    84
    
    
    
    4.53
    %Federal funds sold
    
    
    3,722
    
    
    
    59
    
    
    
    2.11
    %
    
    
    8,546
    
    
    
    361
    
    
    
    5.65
    %Securities, available for sale
    
    
    12,055
    
    
    
    315
    
    
    
    3.48
    %
    
    
    13,327
    
    
    
    501
    
    
    
    5.03
    %Loans
    
    
    946,278
    
    
    
    45,910
    
    
    
    6.46
    %
    
    
    942,000
    
    
    
    51,949
    
    
    
    7.37
    %Sub-total earning assets
    
    
    962,595
    
    
    
    46,287
    
    
    
    6.41
    %
    
    
    966,352
    
    
    
    52,895
    
    
    
    7.32
    %Other assets
    
    
    81,778
    
    
    
    
    
    
    
    
    
    
    
    81,286Total assets
    
    $
    1,044,373
    
    
    
    
    
    
    
    
    
    
    $
    1,047,638Liabilities and stockholders equityInterest bearing deposits
    
    $
    722,926
    
    
    $
    18,666
    
    
    
    3.44
    %
    
    $
    744,886
    
    
    $
    24,687
    
    
    
    4.43
    %Other borrowings
    
    
    98,424
    
    
    
    3,034
    
    
    
    4.11
    %
    
    
    57,543
    
    
    
    2,463
    
    
    
    5.71
    %Sub-total interest bearing liabilities
    
    
    821,350
    
    
    
    21,700
    
    
    
    3.52
    %
    
    
    802,429
    
    
    
    27,150
    
    
    
    4.52
    %Non-interest bearing deposits
    
    
    83,418
    
    
    
    
    
    
    
    
    
    
    
    95,799Other liabilities
    
    
    2,938
    
    
    
    
    
    
    
    
    
    
    
    4,990Stockholders equity
    
    
    136,667
    
    
    
    
    
    
    
    
    
    
    
    144,420Total liabilities and stockholders
equity
    
    $
    1,044,373
    
    
    
    
    
    
    
    
    
    
    $
    1,047,638Net interest income
    
    
    
    
    
    $
    24,587
    
    
    
    
    
    
    
    
    
    
    $
    25,745Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.89
    %
    
    
    
    
    
    
    
    
    
    
    2.80
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    3.40
    %
    
    
    
    
    
    
    
    
    
    
    3.56
    %
 27




---



##### Table of Contents



Rate/Volume Analysis.
 Three Months Ended
    
    
    Nine Months Ended2008/2007
    
    
    
    
    
    
    
    
    
    
    2008/2007Change in Interest Due to:
    
    
    Change in Interest Due to:Average
    
    
    Average
    
    
    Net
    
    
    Average
    
    
    Average
    
    
    Net(In thousands)
    

Balance
    
    
    Rate
    
    
    Change
    
    
    Balance
    
    
    Rate
    
    
    ChangeAssetsInterest bearing deposits with banks
    
    $
    (4
    )
    
    $
    (36
    )
    
    $
    (40
    )
    
    $
    (34
    )
    
    $
    (47
    )
    
    $
    (81
    )Federal funds sold
    
    
    (13
    )
    
    
    (49
    )
    
    
    (62
    )
    
    
    (151
    )
    
    
    (151
    )
    
    
    (302
    )Securities, available for sale
    
    
    (12
    )
    
    
    (51
    )
    
    
    (63
    )
    
    
    (86
    )
    
    
    (100
    )
    
    
    (186
    )Loans
    
    
    (101
    )
    
    
    (2,722
    )
    
    
    (2,823
    )
    
    
    (1,785
    )
    
    
    (4,254
    )
    
    
    (6,039
    )Total earning assets
    
    $
    (130
    )
    
    $
    (2,858
    )
    
    $
    (2,988
    )
    
    $
    (2,055
    )
    
    $
    (4,553
    )
    
    $
    (6,608
    )LiabilitiesInterest bearing deposits
    
    $
    (203
    )
    
    $
    (2,696
    )
    
    $
    (2,899
    )
    
    $
    (2,314
    )
    
    $
    (3,707
    )
    
    $
    (6,021
    )Other borrowings
    
    
    334
    
    
    
    (172
    )
    
    
    162
    
    
    
    1,033
    
    
    
    (462
    )
    
    
    571Total interest bearing liabilities
    
    $
    131
    
    
    $
    (2,868
    )
    
    $
    (2,737
    )
    
    $
    (1,281
    )
    
    $
    (4,169
    )
    
    $
    (5,450
    )Net interest income
    
    
    
    
    
    
    
    
    
    $
    (251
    )
    
    
    
    
    
    
    
    
    
    $
    (1,158
    )Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    0.23
    %
    
    
    
    
    
    
    
    
    
    
    0.08
    %Net interest margin on earning
assets
    
    
    
    
    
    
    
    
    
    
    (0.06
    %)
    
    
    
    
    
    
    
    
    
    
    (0.16
    %)
 Provision for Loan Losses
 2008 Compared to 2007.
 28




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##### Table of Contents



Non-interest Income
 2008 Compared to 2007.
  Non-interest Expense
 2008 Compared to 2007.
  Income Tax Provision
 2008 Compared to 2007.
 29




---



##### Table of Contents



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




---



##### Table of Contents



Loans.
 09/30/08
    
    
    12/31/07
    
    
    09/30/07Consumer loans
    
    $
    32,472
    
    
    $
    35,833
    
    
    $
    35,696Commercial, financial, & other
    
    
    162,828
    
    
    
    174,958
    
    
    
    188,155Land development loans  residential property
    
    
    56,878
    
    
    
    63,639
    
    
    
    47,435Land development loans  non residential property
    
    
    17,894
    
    
    
    10,156
    
    
    
    43,689Commercial real estate construction  residential property
    
    
    20,573
    
    
    
    33,768
    
    
    
    24,643Commercial real estate construction  non residential
property
    
    
    30,145
    
    
    
    40,187
    
    
    
    14,961Commercial real estate mortgages
    
    
    565,365
    
    
    
    539,306
    
    
    
    537,068Residential real estate mortgages
    
    
    53,471
    
    
    
    54,237
    
    
    
    53,975939,626
    
    
    
    952,084
    
    
    
    945,622Allowance for loan losses
    
    
    (16,429
    )
    
    
    (10,617
    )
    
    
    (10,309
    )$
    923,197
    
    
    $
    941,467
    
    
    $
    935,313
  09/30/08
    
    
    12/31/07
    
    
    09/30/07Impaired loans with no allocated allowance for loan losses
    
    $
    35,771
    
    
    $
    27,817
    
    
    $
    21,614Impaired loans with allocated allowance for loan losses
    
    
    46,471
    
    
    
    10,816
    
    
    
    9,671Total
    
    $
    82,242
    
    
    $
    38,633
    
    
    $
    31,285Amount of the allowance for loan loss allocated
    
    $
    8,541
    
    
    $
    879
    
    
    $
    1,225
  09/30/08
    
    
    12/31/07
    
    
    09/30/07Troubled debt restructuring
    
    $
    15,328
    
    
    $
    21,077
    
    
    $
    Over 90 days past due and still accruing
    
    
    3,141
    
    
    
    884
    
    
    
    2,673Non-accrual loans
    
    
    51,342
    
    
    
    18,117
    
    
    
    17,297Total non-performing loans
    
    
    69,811
    
    
    
    40,078
    
    
    
    19,970Real estate owned
    
    
    8,343
    
    
    
    6,319
    
    
    
    3,338Other repossessed assets
    
    
    
    
    
    
    
    
    
    
    Other non-performing assets
    
    
    8,343
    
    
    
    6,319
    
    
    
    3,338Total non-performing assets
    
    $
    78,154
    
    
    $
    46,397
    
    
    $
    23,308
 31




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##### Table of Contents



Number ofLoans
    
    
    BalanceConsumer loans
    
    
    6
    
    
    $
    859Commercial, financial, & other
    
    
    32
    
    
    
    5,123Land development loans  residential property
    
    
    3
    
    
    
    4,729Land development loans  non residential property
    
    
    1
    
    
    
    3,950Commercial real estate construction  residential property
    
    
    7
    
    
    
    4,677Commercial real estate construction  non residential property
    
    
    1
    
    
    
    3,194Commercial real estate mortgages
    
    
    31
    
    
    
    20,272Residential real estate mortgages
    
    
    8
    
    
    
    394Total non-accrual loans
    
    
    89
    
    
    $
    43,198
  Number ofLoans
    
    
    BalanceConsumer loans
    
    
    9
    
    
    $
    1,018Commercial, financial, & other
    
    
    39
    
    
    
    5,647Land development loans  residential property
    
    
    8
    
    
    
    9,325Land development loans  non residential property
    
    
    2
    
    
    
    4,068Commercial real estate construction  residential property
    
    
    9
    
    
    
    6,496Commercial real estate construction  non residential property
    
    
    1
    
    
    
    3,194Commercial real estate mortgages
    
    
    35
    
    
    
    20,853Residential real estate mortgages
    
    
    11
    
    
    
    741Total non-accrual loans
    
    
    114
    
    
    $
    51,342
  32




---



##### Table of Contents



Allowance for Loan Losses.
 33




---



##### Table of Contents



Nine Months Ended
    
    
    Year Ended
    
    
    Nine Months Ended09/30/08
    
    
    12/31/07
    
    
    09/30/07Balance, beginning of year
    
    $
    10,617
    
    
    $
    7,775
    
    
    $
    7,775Allowance on loans acquired
    
    
    
    
    
    
    1,704
    
    
    
    1,704Charge-offs:Consumer loans
    
    
    176
    
    
    
    226
    
    
    
    190Commercial, financial & other
    
    
    3,155
    
    
    
    914
    
    
    
    829Land development loans  residential property
    
    
    229
    
    
    
    1,665
    
    
    
    1,344Land development loans  non residential property
    
    
    
    
    
    
    
    
    
    
    14Commercial real estate construction  residential property
    
    
    58
    
    
    
    1,291
    
    
    
    1,378Commercial real estate construction  non residential
property
    
    
    
    
    
    
    
    
    
    
    Commercial real estate mortgages
    
    
    190
    
    
    
    662
    
    
    
    446Residential real estate mortgages
    
    
    188
    
    
    
    320
    
    
    
    320Recoveries:Consumer loans
    
    
    16
    
    
    
    25
    
    
    
    23Commercial, financial & other
    
    
    61
    
    
    
    224
    
    
    
    223Land development loans  residential property
    
    
    
    
    
    
    
    
    
    
    Land development loans  non residential property
    
    
    
    
    
    
    
    
    
    
    Commercial real estate construction  residential property
    
    
    
    
    
    
    6
    
    
    
    Commercial real estate construction  non residential
property
    
    
    
    
    
    
    
    
    
    
    Commercial real estate mortgages
    
    
    5
    
    
    
    140
    
    
    
    139Residential real estate mortgages
    
    
    4
    
    
    
    
    
    
    
    Net charge-offs (recoveries)
    
    
    3,910
    
    
    
    4,683
    
    
    
    4,136Provision for loan losses
    
    
    9,722
    
    
    
    5,821
    
    
    
    4,966Balance, end of period
    
    $
    16,429
    
    
    $
    10,617
    
    
    $
    10,309Allowance to total loans
    
    
    1.75
    %
    
    
    1.12
    %
    
    
    1.09
    %
 Premises and Equipment.
 Real estate owned.
 34




---



##### Table of Contents



Goodwill and other intangible assets.
 GrossCarrying
    
    
    AccumulatedAmount
    
    
    AmortizationCore deposit intangible from acquisition of:Bank of Washtenaw
    
    $
    929
    
    
    $
    459Fidelity Financial Corporation of Michigan
    
    
    6,863
    
    
    
    1,379Total core deposit intangible
    
    $
    7,792
    
    
    $
    1,838Borrower relationship intangible from acquisition of :Bank of Washtenaw
    
    $
    1,620
    
    
    $
    496Fidelity Financial Corporation of Michigan
    
    
    3,558
    
    
    
    471Total borrower relationship intangible
    
    $
    5,178
    
    
    $
    967Total intangible assets
    
    $
    12,970
    
    
    $
    2,805
   Accrued Interest Receivable.
 Other Assets
 35




---



##### Table of Contents



Deposits.
 09/30/08
    
    
    12/31/07
    
    
    09/30/07Non-interest bearing:Demand
    
    $
    84,073
    
    
    $
    83,594
    
    
    $
    92,770Interest bearing:Checking
    
    $
    91,122
    
    
    $
    65,196
    
    
    $
    65,751Money market
    
    
    81,274
    
    
    
    106,145
    
    
    
    110,044Savings
    
    
    60,893
    
    
    
    29,814
    
    
    
    32,629Time, under $100,000
    
    
    194,530
    
    
    
    193,852
    
    
    
    185,335Time, $100,000 and over
    
    
    347,377
    
    
    
    344,026
    
    
    
    375,005775,196
    
    
    
    739,033
    
    
    
    768,764Total deposits
    
    $
    859,269
    
    
    $
    822,627
    
    
    $
    861,534
   09/30/08
    
    
    12/31/07
    
    
    09/30/07Interest bearing checking
    
    $
    2,083
    
    
    $
    1,740
    
    
    $
    2,472Time, $100,000 and over
    
    
    77,578
    
    
    
    109,695
    
    
    
    113,635Total municipal deposits
    
    $
    79,661
    
    
    $
    111,435
    
    
    $
    116,107
  36




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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 .
 Capital
  37




---



##### Table of Contents



MinimumTo Be Well CapitalizedMinimum for Capital
    
    Under Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAs of September 30, 2008Total capital
(to risk weighted assets)Consolidated
    
    
    111,719
    
    
    
    11.59
    %
    
    
    77,141
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    109,166
    
    
    
    11.35
    %
    
    
    76,964
    
    
    
    8.00
    %
    
    
    96,204
    
    
    
    10.00
    %Tier 1 capital
(to risk weighted assets)Consolidated
    
    
    99,639
    
    
    
    10.33
    %
    
    
    38,571
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    97,086
    
    
    
    10.09
    %
    
    
    38,482
    
    
    
    4.00
    %
    
    
    57,723
    
    
    
    6.00
    %Tier 1 capital
(to average assets)Consolidated
    
    
    99,639
    
    
    
    9.99
    %
    
    
    39,912
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    97,086
    
    
    
    9.76
    %
    
    
    39,809
    
    
    
    4.00
    %
    
    
    49,761
    
    
    
    5.00
    %As of December 31, 2007Total capital
(to risk weighted assets)Consolidated
    
    
    112,984
    
    
    
    11.57
    %
    
    
    78,108
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    110,486
    
    
    
    11.34
    %
    
    
    77,972
    
    
    
    8.00
    %
    
    
    97,465
    
    
    
    10.00
    %Tier 1 capital
(to risk weighted assets)Consolidated
    
    
    102,367
    
    
    
    10.48
    %
    
    
    39,054
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    99,869
    
    
    
    10.25
    %
    
    
    38,956
    
    
    
    4.00
    %
    
    
    58,479
    
    
    
    6.00
    %Tier 1 capital
(to average assets)Consolidated
    
    
    102,367
    
    
    
    10.15
    %
    
    
    40,334
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    99,869
    
    
    
    9.99
    %
    
    
    39,989
    
    
    
    4.00
    %
    
    
    49,987
    
    
    
    5.00
    %
   38




---



##### Table of Contents



PART I    FINANCIAL INFORMATION
 
  Interest Rate Sensitivity Analysis.
   39




---



##### Table of Contents



1-90
    
    
    91-365
    
    
    1-5
    
    
    Over(In thousands)
    
    Days
    
    
    Days
    
    
    Years
    
    
    5 Years
    
    
    TotalEarning assetsFederal funds sold
    
    $
    14,281
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    14,281Interest bearing deposits with Banks
    
    
    33,146
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,146Mortgage loans held for sale
    
    
    281
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    281Securities available for sale
    
    
    1,003
    
    
    
    118
    
    
    
    1,125
    
    
    
    274
    
    
    
    2,520Federal Home Loan Bank stock
    
    
    3,614
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,614Total loans, net of non-accrual
    
    
    242,900
    
    
    
    85,705
    
    
    
    513,336
    
    
    
    46,343
    
    
    
    888,284Total earning assets
    
    
    295,225
    
    
    
    85,823
    
    
    
    514,461
    
    
    
    46,617
    
    
    
    942,126Interest bearing liabilitiesTotal interest bearing deposits
    
    
    435,471
    
    
    
    172,854
    
    
    
    166,613
    
    
    
    258
    
    
    
    775,196Federal Home Loan Bank advances
    
    
    22,263
    
    
    
    10,000
    
    
    
    40,020
    
    
    
    
    
    
    
    72,283Other Borrowings
    
    
    222
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    222Subordinated debentures
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Total interest bearing liabilities
    
    
    467,956
    
    
    
    182,854
    
    
    
    206,633
    
    
    
    258
    
    
    
    857,701Net asset (liability) funding gap
    
    
    (172,731
    )
    
    
    (97,031
    )
    
    
    307,828
    
    
    
    46,359
    
    
    $
    84,425Cumulative net asset (liability) funding gap
    
    $
    (172,731
    )
    
    $
    (269,762
    )
    
    $
    38,066
    
    
    $
    84,425
 40




---



##### Table of Contents



Liquidity.
   41




---



##### Table of Contents



Payments Due By PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    Over 51 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    Years
    
    
    TotalSecurities sold under agreements
to repurchase
    
    $
    222
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    222Certificates of deposit
    
    
    375,037
    
    
    
    165,342
    
    
    
    1,270
    
    
    
    258
    
    
    
    541,907Long-term borrowings
    
    
    32,264
    
    
    
    29,683
    
    
    
    10,336
    
    
    
    
    
    
    
    72,283Lease commitments
    
    
    786
    
    
    
    1,183
    
    
    
    164
    
    
    
    
    
    
    
    2,133Subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    10,000Totals
    
    $
    408,309
    
    
    $
    196,208
    
    
    $
    11,770
    
    
    $
    10,258
    
    
    $
    626,545
  Amount Of Commitment Expiration Per PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    Over 51 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    Years
    
    
    TotalUnused loan commitments
    
    $
    106,324
    
    
    $
    17,509
    
    
    $
    10,283
    
    
    $
    14,108
    
    
    $
    148,224Standby letters of credit
    
    
    2,953
    
    
    
    41
    
    
    
    2,000
    
    
    
    
    
    
    
    4,994Totals
    
    $
    109,277
    
    
    $
    17,550
    
    
    $
    12,283
    
    
    $
    14,108
    
    
    $
    153,218
 42




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##### Table of Contents



Item 4. Controls and Procedures
 Disclosure Controls and Procedures -
 Internal Controls Over Financial Reporting
 43




---



##### 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.
 (b)
    
    A Form 8-K Report, dated July 17, 2008 was filed during the quarter ended September 30,
2008.
 44




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##### Table of Contents



SIGNATURES
  Dearborn Bancorp, Inc.(Registrant)/s/ John E. DemmerJohn E. DemmerChairman/s/ Michael J. RossMichael J. RossPresident and Chief Executive Officer/s/ Jeffrey L. KarafaJeffrey L. KarafaTreasurer and Chief Financial Officer
  45