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SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly period ended March 31, 2007.
 Commission file number 000-24478
 DEARBORN BANCORP, INC.
  Michigan
    
    38-3073622(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)1360 Porter Street, Dearborn, MI
    
    48124(Address of principal executive office)
    
    (Zip Code)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
  þ o
  Class
    
    Shares OutstandingCommon Stock
    
    8,653,578
  o þ o
  o þ




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##### 



PagePart I. Financial Information:Item 1. Financial StatementsThe following consolidated financial statements of Dearborn
Bancorp, Inc. and its subsidiary included in this report are:Report of Independent Registered Public Accounting Firm
    
    
    3Consolidated Balance Sheets  March 31, 2007,
December 31, 2006 and March 31, 2006
    
    
    4Consolidated Statements of Income  For the Three
Months Ended March 31, 2007 and 2006
    
    
    5Consolidated Statements of Comprehensive Income   For
the Three Months Ended March 31, 2007 and 2006
    
    
    6Consolidated Statements of Cash Flows  For the
Three Months Ended March 31, 2007 and 2006
    
    
    7Notes to Consolidated Financial Statements
    
    
    9-16Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations, Liquidity and Capital
    
    
    17-32Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    33-35Item 4. Controls and Procedures
    
    
    36Part 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
    
    
    37Pursuant to SEC rules and regulations, the following items are omitted
from this Form 10-Q as inapplicable or to which the answer is negative:Item 1. Legal ProceedingsItem 2. Changes in Securities and Use of ProceedsItem 3. Defaults upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security Holders Item 5 Other InformationSIGNATURES
    
    
    38Section 302 Certification of Chief Executive OfficerSection 302 Certification of Chief Financial OfficerSection 906 Certification of Chief Executive OfficerSection 906 Certification of Chief Financial Officer
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS (unaudited)
 (Dollars, in thousands)
    
    03/31/07
    
    
    12/31/06
    
    
    03/31/06ASSETSCash and cash equivalentsCash and due from banks
    
    $
    15,720
    
    
    $
    5,824
    
    
    $
    12,966Federal funds sold
    
    
    8,956
    
    
    
    64,198
    
    
    
    11,113Interest bearing deposits with banks
    
    
    59
    
    
    
    8
    
    
    
    23,991Total cash and cash equivalents
    
    
    24,735
    
    
    
    70,030
    
    
    
    48,070Mortgage loans held for sale
    
    
    582
    
    
    
    1,823
    
    
    
    545Securities, available for sale
    
    
    10,554
    
    
    
    5,878
    
    
    
    11,443Federal Home Loan Bank stock
    
    
    1,927
    
    
    
    1,288
    
    
    
    1,293Loans
Loans
    
    
    938,510
    
    
    
    756,420
    
    
    
    676,233Allowance for loan loss
    
    
    (9,647
    )
    
    
    (7,775
    )
    
    
    (6,965
    )Net loans
    
    
    928,863
    
    
    
    748,645
    
    
    
    669,268Premises and equipment, net
    
    
    23,376
    
    
    
    14,293
    
    
    
    13,663Real estate owned
    
    
    3,157
    
    
    
    52
    
    
    
    177Goodwill
    
    
    32,133
    
    
    
    5,473
    
    
    
    5,473Other intangible assets
    
    
    14,033
    
    
    
    2,041
    
    
    
    2,229Accrued interest receivable
    
    
    4,019
    
    
    
    3,337
    
    
    
    2,455Other assets
    
    
    2,500
    
    
    
    3,071
    
    
    
    2,543Total assets
    
    $
    1,045,879
    
    
    $
    855,931
    
    
    $
    757,159LIABILITIESDepositsNon-interest bearing deposits
    
    $
    99,923
    
    
    $
    53,065
    
    
    $
    60,689Interest bearing deposits
    
    
    748,113
    
    
    
    580,151
    
    
    
    571,548Total deposits
    
    
    848,036
    
    
    
    633,216
    
    
    
    632,237Other liabilitiesFederal funds purchased
    
    
    
    
    
    
    37,300
    
    
    
    Securities sold under agreements to repurchase
    
    
    355
    
    
    
    619
    
    
    
    457Federal Home Loan Bank advances
    
    
    37,241
    
    
    
    25,561
    
    
    
    25,588Other liabilities
    
    
    650
    
    
    
    516
    
    
    
    350Accrued interest payable
    
    
    4,627
    
    
    
    3,734
    
    
    
    2,158Subordinated debentures
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000Total liabilities
    
    
    900,909
    
    
    
    710,946
    
    
    
    670,790STOCKHOLDERS EQUITYCommon stock - 10,000,000 shares authorized,
8,876,368 shares at 03/31/07, 8,975,085 shares at
12/31/06; and 5,991,662 shares at 03/31/06
    
    
    143,263
    
    
    
    144,907
    
    
    
    83,887Retained earnings
    
    
    1,702
    
    
    
    84
    
    
    
    2,519Accumulated other comprehensive income (loss)
    
    
    5
    
    
    
    (6
    )
    
    
    (37
    )Total stockholders equity
    
    
    144,970
    
    
    
    144,985
    
    
    
    86,369Total liabilities and stockholders equity
    
    $
    1,045,879
    
    
    $
    855,931
    
    
    $
    757,159
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF INCOME (unaudited)
 Three Months Ended
    
    
    Three Months Ended(In thousands, except share and per share data)
    
    03/31/07
    
    
    03/31/06Interest incomeInterest on loans
    
    $
    17,125
    
    
    $
    11,946Interest on securities, available for sale
    
    
    178
    
    
    
    163Interest on federal funds
    
    
    168
    
    
    
    68Interest on deposits with banks
    
    
    
    
    
    
    67Total interest income
    
    
    17,471
    
    
    
    12,244Interest expenseInterest on deposits
    
    
    7,778
    
    
    
    4,873Interest on other borrowings
    
    
    804
    
    
    
    320Interest on subordinated debentures
    
    
    240
    
    
    
    195Total interest expense
    
    
    8,822
    
    
    
    5,388Net interest income
    
    
    8,649
    
    
    
    6,856Provision for loan losses
    
    
    617
    
    
    
    157Net interest income after provision for loan losses
    
    
    8,032
    
    
    
    6,699Non-interest incomeService charges on deposit accounts
    
    
    318
    
    
    
    157Fees for other services to customers
    
    
    54
    
    
    
    13Gain on the sale of loans
    
    
    54
    
    
    
    42Gain on the sale of other real estate owned
    
    
    
    
    
    
    (54
    )Other income
    
    
    19
    
    
    
    11Total non-interest income
    
    
    445
    
    
    
    169Non-interest expensesSalaries and employee benefits
    
    
    3,552
    
    
    
    2,432Occupancy and equipment expense
    
    
    958
    
    
    
    630Intangible expense
    
    
    336
    
    
    
    62Advertising and marketing
    
    
    77
    
    
    
    88Stationery and supplies
    
    
    124
    
    
    
    72Professional services
    
    
    264
    
    
    
    183Data processing
    
    
    124
    
    
    
    125Other operating expenses
    
    
    552
    
    
    
    327Total non-interest expenses
    
    
    5,987
    
    
    
    3,919Income before income tax provision
    
    
    2,490
    
    
    
    2,949Income tax provision
    
    
    872
    
    
    
    1,003Net income
    
    $
    1,618
    
    
    $
    1,946Per share data:Net income  basic
    
    $
    0.18
    
    
    $
    0.33Net income  diluted
    
    $
    0.18
    
    
    $
    0.31Weighted average number of shares outstanding  basic
    
    
    8,898,058
    
    
    
    5,982,377Weighted average number of shares outstanding 
diluted
    
    
    9,159,855
    
    
    
    6,303,882
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
 Three Months Ended
    
    
    Three Months Ended(In thousands)
    
    03/31/07
    
    
    03/31/06Net income
    
    $
    1,618
    
    
    $
    1,946Other comprehensive income , net of taxUnrealized gains on securitiesUnrealized holding gains arising during period
    
    
    15
    
    
    
    11Less: reclassification adjustment for gains
included
in net income
    
    
    
    
    
    
    Tax effects
    
    
    (4
    )
    
    
    (4
    )Other comprehensive income
    
    
    11
    
    
    
    7Comprehensive income
    
    $
    1,629
    
    
    $
    1,953
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months Ended(In thousands)
    
    3/31/2007
    
    
    3/31/2006Cash flows from operating activitiesInterest and fees received
    
    $
    16,789
    
    
    $
    12,375Interest paid
    
    
    (7,929
    )
    
    
    (4,913
    )Proceeds from sale of mortgages held for sale
    
    
    6,991
    
    
    
    5,299Origination of mortgages held for sale
    
    
    (5,666
    )
    
    
    (4,722
    )Taxes paid
    
    
    (100
    )
    
    
    (600
    )Loss on sale of real estate owned
    
    
    
    
    
    
    (54
    )Cash paid to suppliers and employees
    
    
    (8,194
    )
    
    
    (4,007
    )Net cash provided by operating activities
    
    
    1,891
    
    
    
    3,378Cash flows from investing activitiesProceeds from the sale of securities available for sale
    
    
    18,007
    
    
    
    Proceeds from calls, maturities and repayments of
Of securities available for sale
    
    
    108
    
    
    
    5,735Purchases of securities available for sale
    
    
    (22,741
    )
    
    
    Purchase of Federal Home Loan Bank stock
    
    
    (639
    )
    
    
    Increase in loans, net of payments received
    
    
    (2,986
    )
    
    
    (19,196
    )Purchases of property and equipment
    
    
    (4,708
    )
    
    
    (108
    )Net cash paid in Fidelity acquisition
    
    
    (32,134
    )
    
    
    Net cash used in investing activities
    
    
    (45,093
    )
    
    
    (13,569
    )Cash flows from financing activitiesNet increase in non-interest bearing deposits
    
    
    850
    
    
    
    1,045Net increase in interest bearing deposits
    
    
    26,423
    
    
    
    48,754Increase (decrease) in other borrowings
    
    
    (264
    )
    
    
    (1,158
    )Decrease in federal funds payable
    
    
    (37,300
    )
    
    
    Proceeds from Federal Home Loan Bank advances
    
    
    9,913
    
    
    
    Purchase of common stock
    
    
    (1,929
    )
    
    
    Exercise of stock options
    
    
    31
    
    
    
    125Tax benefit of stock options exercised
    
    
    183
    
    
    
    40Net cash provided by (used in) financing activities
    
    
    (2,093
    )
    
    
    48,806Increase (decrease) in cash and cash equivalents
    
    
    (45,295
    )
    
    
    38,615Cash and cash equivalents at the beginning of the period
    
    
    70,030
    
    
    
    9,455Cash and cash equivalents at the end of the period
    
    $
    24,735
    
    
    $
    48,070
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 Three Months Ended(In thousands)
    
    3/31/2007
    
    
    3/31/2006Reconciliation of net income to net cash provided by operating activitiesNet income
    
    $
    1,618
    
    
    $
    1,946Adjustments to reconcile net income to net cash
provided by operating activitiesProvision for loan losses
    
    
    617
    
    
    
    157Depreciation and amortization expense
    
    
    337
    
    
    
    237Restricted stock award expense
    
    
    49
    
    
    
    26Stock option expense
    
    
    22
    
    
    
    12Accretion of discount on investment securities
    
    
    (35
    )
    
    
    (21
    )Amortization of premium on investment securities
    
    
    
    
    
    
    7Amortization of intangible assets
    
    
    336
    
    
    
    62Decrease in mortgages held for sale
    
    
    1,241
    
    
    
    496Decrease in interest receivable
    
    
    562
    
    
    
    131Increase in interest payable
    
    
    556
    
    
    
    475(Increase) decrease in other assets
    
    
    (1,589
    )
    
    
    460Decrease in other liabilities
    
    
    (1,823
    )
    
    
    (610
    )Net cash provided by operating activities
    
    $
    1,891
    
    
    $
    3,378Supplemental noncash disclosures:Transfers from loans to real estate owned
    
    $
    2,525
    
    
    $
    39Noncash investing activities:Fidelity Bank acquisition:Loans acquired
    
    
    178,052
    
    
    
    Bank premises and equipment
    
    
    9,214
    
    
    
    Acquisition intangibles recorded
    
    
    34,195
    
    
    
    Other assets acquired
    
    
    2,194
    
    
    
    Deposits assumed
    
    
    (187,459
    )
    
    
    Borrowings assumed
    
    
    (1,767
    )
    
    
    Other liabilities assumed
    
    
    (2,295
    )
    
    
    $
    32,134
    
    
    
    
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A.
    
    Accounting and Reporting PoliciesThe consolidated financial statements of Dearborn Bancorp, Inc. (the Corporation) include
the consolidation of its only subsidiary, Community Bank of Dearborn (the Bank). The
accounting and reporting policies of the Corporation are in accordance with accounting
principles generally accepted in the United States of America and conform to practice
within the banking industry.The consolidated financial statements of the Corporation as of March 31, 2007 and 2006, and
December 31, 2006 and for the three month periods ended March 31, 2007 and 2006 reflect all
adjustments, consisting of normal recurring items which are in the opinion of management,
necessary for a fair presentation of the results for the interim period. The operating
results for the quarter are not necessarily indicative of results of operations for the
entire year.The consolidated financial statements as of March 31, 2007 and 2006, and for the three
months ended March 31, 2007 and 2006 included herein have been prepared by the Corporation,
without an audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in 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 2006 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.
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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.
Stock options for 35,244 and 17,463 shares of common stock were not
considered in computing diluted earnings per common share for the
three months ended March 31, 2007 and 2006, respectively,
because they were antidilutive. All share and per share amounts have been adjusted for stock
dividends.Effect of Newly Issued Accounting StandardsThe Financial Accounting Standards Board (FASB) Interpretation 48, Accounting for
Uncertainty in Income Taxes (FIN 48), was adopted as of January 1, 2007. A tax position is
recognized as a benefit only if it is more likely than not that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur. The amount
recognized is the largest amount of tax benefit that is greater than 50% likely of being
realized on examination. For tax positions not meeting the more than likely than not test,
no tax benefit is recorded. The adoption had no material affect on the Corporations
consolidated financial statements. The Corporation is no longer
subject to examination by
federal taxing authorities for years before 2003.Effect of Newly Issued but not yet Effective Accounting StandardsIn February 2006, FASB issued Statement No. 159, The Fair Value Option for Financial Assets
and Liabilities (SFAS 159). Adoption of SFAS 159 is required for January 1, 2008. Early
adoption was allowed, effective to January 1, 2007, if that election was made by April 30,
2007. This statement allows, but does not require, companies to record certain assets and
liabilities at their fair value. The fair value determination is made at the instrument
level, so similar assets or liabilities could be partially accounted for using the
historical cost method, while other similar assets or liabilities are accounted for using
the fair value method. Changes in fair value are recorded through the income statement in
subsequent periods. The statement provides for a one time opportunity to transfer existing
assets and liabilities to fair value at the point of adoption with a cumulative effect
adjustment recorded against equity. After adoption, the election to report assets or
liabilities at fair value must be made at the point of their inception. The Corporation did
not elect early adoption of SFAS 159 and has not yet determined which, if any, assets or
liabilities may be reported using the fair value accounting method. As such, the Company has
not yet determined the impact that the adoption of this statement may have on the Companys
consolidated financial statements.
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B.
    
    Securities Available For SaleThe amortized cost and fair value of securities available for sale are as follows (in
thousands):
 March 31, 2007Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueUS Treasury securities
    
    $
    9,408
    
    
    $
    1
    
    
    
    ($7
    )
    
    $
    9,402Municipal bonds
    
    
    759
    
    
    
    10
    
    
    
    
    
    
    
    769Mortgage backed securities
    
    
    380
    
    
    
    3
    
    
    
    
    
    
    
    383Totals
    
    $
    10,547
    
    
    $
    14
    
    
    
    ($7
    )
    
    $
    10,554
 December 31, 2006Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueUS Treasury securities
    
    $
    4,982
    
    
    $
    
    
    
    
    ($14
    )
    
    $
    4,968Municipal bonds
    
    
    497
    
    
    
    4
    
    
    
    
    
    
    
    501Mortgage backed securities
    
    
    407
    
    
    
    2
    
    
    
    
    
    
    
    409Totals
    
    $
    5,886
    
    
    $
    6
    
    
    
    ($14
    )
    
    $
    5,878
 The amortized cost and fair value of securities available for sale at March 31, 2007
by contractual maturity are shown below (in thousands):
 Amortized
    
    
    FairCost
    
    
    ValueDue in less than three months
    
    $
    2,248
    
    
    $
    2,248Due in three months through one year
    
    
    7,160
    
    
    
    7,154Due in one year through five years
    
    
    759
    
    
    
    769Mortgage backed securities
    
    
    380
    
    
    
    383Totals
    
    $
    10,547
    
    
    $
    10,554
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B.
    
    Securities Available For Sale (cont)The entire portfolio has a net unrealized gain of $7,000 at March 31, 2007. Securities
with unrealized losses at March 31, 2007, aggregated by investment category and the length
of time that the securities have been in a continuous loss position, are as follows (in
thousands):
 Investment category
    
    Fair Value
    
    
    Unrealized LossUS treasury securities
    
    $
    4,230
    
    
    $
    7Total temporarily impaired
    
    $
    4,230
    
    
    $
    7
 Length of time in a continuous loss position
    
    Fair Value
    
    
    Unrealized LossLess than one year
    
    $
    2,237
    
    
    $
    6One to three years
    
    
    1,993
    
    
    
    1Total temporarily impaired
    
    $
    4,230
    
    
    $
    7
 Unrealized losses on securities, available for sale at March 31, 2007 have not been
recognized because these securities are of high credit quality, management has the intent
and ability to hold these securities for the foreseeable future, and the decline in fair
value is believed to be largely due to changes in interest rates. The fair value is
expected to recover as the bonds approach their maturity date.The Corporation does not hold any securities in the Held to Maturity category nor
does the Corporation hold or utilize derivatives.
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C.
    
    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, 2007
    
    
    
    
    
    
    468,423
    
    
    $
    8.16Exercised
    
    
    
    
    
    
    (7,096
    )
    
    
    4.59Outstanding at March 31, 2007
    
    
    
    
    
    
    461,327
    
    
    $
    8.22
 For the options outstanding at March 31, 2007, the range of exercise prices was $4.18
to $14.65 per share with a weighted-average remaining contractual term of 4.2 years. At
March 31, 2007, 461,327 options were exercisable at weighted average exercise price of $8.22
per share. The intrinsic value of options exercised during the quarter was approximately $115,000 and
the intrinsic value of options outstanding at March 31, 2007 was approximately $4,277,000.During 2005, the Corporation initiated the 2005 Long-Term Incentive Plan. Under this plan,
up to 347,248 shares may be granted to officers and employees of the Bank. This plan
provides that stock awards may take the form of any combination of options, restricted
shares, restricted share units or performance awards.The administration of the plan, including the granting of awards and the nature of those
awards is determined by the Corporations Compensation Committee. The Corporations Board
of Directors approved grants of stock options and restricted stock in 2005 and 2006. The
awards have a term of ten years and typically vest fully three years from the grant date.
In order for vesting to occur, the Corporation must meet certain performance criteria over
the vesting period. The 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
150% of the currently recorded compensation cost, depending on the Corporations actual
performance.
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##### Table of Contents



C.
    
    Incentive Stock Plans (cont)Stock Options Granted  The incentive stock options were granted with exercise prices equal
to market prices on the day of grant. At March 31, 2007, there were 35,251 stock options
granted with a weighted average exercise price of $21.83. These options are eligible to
vest fully three years from grant date.The Corporation recognized stock option compensation expense of $22,000 during the three
months ended March 31, 2007. Compensation cost of $87,000, $44,000 and $22,000 is expected
to be recognized during 2007, 2008 and 2009, respectively.Restricted Stock Grants   Restricted stock was awarded to officers in 2005 and 2006. The
restricted stock is elegible to vest three years from grant date. At March 31, 2007, there
were 23,956 shares of restricted stock outstanding.The Corporation recognized restricted stock compensation expense of $49,000 and a tax
benefit of $17,000 during the three months ended March 31, 2007. Compensation cost of
$197,000, $93,000 and $47,000 is expected to be recognized during 2007, 2008 and 2009,
respectively.
 14




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##### Table of Contents



D.
    
    AcquisitionOn January 4, 2007, the Corporation acquired Fidelity Financial Corporation of Michigan
(Fidelity) for $70,500,000 in cash. Fidelity was founded in 1973 and has its
main office in Birmingham, Michigan with single branch offices in Bloomfield Township,
Michigan and Bingham Farms, Michigan and four branch offices in Southfield, Michigan. As of
December 31, 2006, Fidelity had total assets of $220,419,000, gross loans of $179,553,000
and total deposits of $187,547,000. Fidelitys results of
operations are included in these financial statements since the date
of acquisition.The acquisition of Fidelity will enable the Corporation to build a competitive presence in
Oakland County for the Banks loan and deposit products. Management expects to build upon
Fidelitys reputation and continue to increase the Banks presence in Oakland County, while
decreasing operating expenses by utilizing the infrastructure and operational capabilities
already in place at the Bank.The acquisition has been accounted for using the purchase method of accounting, and
accordingly, the purchase price has been allocated to the tangible and identified intangible
assets purchased and the liabilities assumed based upon the estimated fair values at the
date of acquisition. There are refinements in the process of allocating the purchase price
that have not been entirely completed. Identified intangible assets and purchase accounting
fair value adjustments are being amortized under various methods over the expected lives of
the corresponding assets and liabilities. Goodwill will not be amortized, but will be
reviewed for impairment on an annual basis. Goodwill and other intangible assets are tax
deductible over 15 years. Currently, identified intangible assets from the acquisition of
Fidelity subject to amortization are $12,056,000. Goodwill from the acquisition of Fidelity
aggregates to $26,660,000.The table displayed on the following page presents pro forma information for the Corporation
including the acquisition of Fidelity for the three months ended March 31, 2006 as if the
acquisition had occurred at the beginning of 2006. The pro forma financial information does
not purport to be indicative of the operating results or financial position that would have
actually occurred or existed if the transactions had occurred on the dates indicated, nor is
it indicative of our future operating results or our financial position.
 15




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##### Table of Contents



D.
    
    Acquisition (cont)
 Three Months Ended(In thousands, except share and per share data
    
    03/31/06Interest income
    
    $
    15,937Interest expense
    
    
    6,416Net interest income
    
    
    9,521Provision for loan loss
    
    
    227Net interest income after provision for loan losses
    
    
    9,294Non-interest income
    
    
    545Non-interest expense
    
    
    6,027Income before income tax provision
    
    
    3,812Income tax provision
    
    
    1,296Net income
    
    $
    2,516Basic earnings per shareDiluted earnings per shareWeighted average shares outstanding  basic
    
    $
    0.27Weighted average shares outstanding  diluted
    
    $
    0.26
 16




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##### Table of Contents



PART I    FINANCIAL INFORMATION
 
     17




---



##### Table of Contents



Company Overview
         18




---



##### Table of Contents



Date Formed
    
    Name
    
    Services OfferedAugust 1997
    
    Community Bank Insurance Agency, Inc.
    
    Limited insurance related activitiesMay 2001
    
    Community Bank Mortgage, Inc.
    
    Origination of commercial and
residential mortgage loansMarch 2002
    
    Community Bank Audit Services, Inc.
    
    Internal auditing and compliance
services for financial institutions
       19




---



##### 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 ATMJanuary 2007
    
    17117 W. Nine Mile Road
Southfield, Mi 48075
    
    Full service retail branch with ATM
 20




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##### Table of Contents



Results of Operations
  Net Interest Income
 2007
Compared to 2006.
 Average Balances, Interest Rates and Yields.
 21




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##### Table of Contents



Three months ended
    
    
    Three months endedMarch 31, 2007
    
    
    March 31, 2006Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(In thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsInterest bearing deposits with banks
    
    $
    279
    
    
    $
    2
    
    
    
    2.91
    %
    
    $
    5,558
    
    
    $
    67
    
    
    
    4.89
    %Federal funds sold
    
    
    10,309
    
    
    
    166
    
    
    
    6.53
    %
    
    
    5,975
    
    
    
    68
    
    
    
    4.62
    %Securities, available for sale
    
    
    14,440
    
    
    
    178
    
    
    
    5.00
    %
    
    
    16,949
    
    
    
    163
    
    
    
    3.90
    %Loans
    
    
    936,288
    
    
    
    17,125
    
    
    
    7.42
    %
    
    
    663,597
    
    
    
    11,946
    
    
    
    7.30
    %Sub-total earning assets
    
    
    961,316
    
    
    
    17,471
    
    
    
    7.37
    %
    
    
    692,079
    
    
    
    12,244
    
    
    
    7.17
    %Other assets
    
    
    79,387
    
    
    
    
    
    
    
    
    
    
    
    30,072Total assets
    
    $
    1,040,703
    
    
    
    
    
    
    
    
    
    
    $
    722,151Liabilities and stockholders equityInterest bearing deposits
    
    $
    725,266
    
    
    $
    7,778
    
    
    
    4.35
    %
    
    $
    537,436
    
    
    $
    4,873
    
    
    
    3.68
    %Other borrowings
    
    
    71,114
    
    
    
    1,044
    
    
    
    5.95
    %
    
    
    38,951
    
    
    
    515
    
    
    
    5.36
    %Sub-total interest bearing liabilities
    
    
    796,380
    
    
    
    8,822
    
    
    
    4.49
    %
    
    
    576,387
    
    
    
    5,388
    
    
    
    3.79
    %Non-interest bearing deposits
    
    
    92,225
    
    
    
    
    
    
    
    
    
    
    
    57,795Other liabilities
    
    
    5,773
    
    
    
    
    
    
    
    
    
    
    
    2,226Stockholders equity
    
    
    146,325
    
    
    
    
    
    
    
    
    
    
    
    85,743Total liabilities and stockholders equity
    
    $
    1,040,703
    
    
    
    
    
    
    
    
    
    
    $
    722,151Net interest income
    
    
    
    
    
    $
    8,649
    
    
    
    
    
    
    
    
    
    
    $
    6,856Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.88
    %
    
    
    
    
    
    
    
    
    
    
    3.38
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    3.65
    %
    
    
    
    
    
    
    
    
    
    
    4.02
    %
 22




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##### Table of Contents



Rate/Volume Analysis.
 Three Months Ended March 31, 2007/2006Change in Interest Due to:Average
    
    
    Average
    
    
    Net(In thousands)
    
    Balance
    
    
    Rate
    
    
    ChangeAssetsInterest bearing deposits with banks
    
    $
    (38
    )
    
    $
    (27
    )
    
    $
    (65
    )Federal funds sold
    
    
    70
    
    
    
    28
    
    
    
    98Investment securities, available for sale
    
    
    (31
    )
    
    
    46
    
    
    
    15Loans
    
    
    4,988
    
    
    
    191
    
    
    
    5,179Total earning assets
    
    $
    4,989
    
    
    $
    238
    
    
    $
    5,227LiabilitiesInterest bearing deposits
    
    $
    2,014
    
    
    $
    891
    
    
    $
    2,905Other borrowings
    
    
    472
    
    
    
    57
    
    
    
    529Total interest bearing liabilities
    
    $
    2,487
    
    
    $
    947
    
    
    $
    3,434Net interest income
    
    
    
    
    
    
    
    
    
    $
    1,793Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    (0.50
    %)Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    (0.37
    %)
 Provision for Loan Losses
 2007 Compared to 2006.
 23




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##### Table of Contents



Non-interest Income
 2007 Compared to 2006.
 Non-interest Expense
 2007 Compared to 2006.
  Income Tax Provision
 2007 Compared to 2006.
 24




---



##### Table of Contents



Comparison of Financial Condition at March 31, 2007 and December 31, 2006
 Assets.
 Federal Funds Sold.
 Interest bearing deposits with banks.
 Mortgage Loans Held for Sale.
 Securities  Available for Sale.
  Federal Home Loan Bank Stock.
 25




---



##### Table of Contents



Loans.
 03/31/07
    
    
    12/31/06
    
    
    03/31/06Consumer loans
    
    $
    36,908
    
    
    $
    32,282
    
    
    $
    31,010Commercial, financial, & other
    
    
    192,330
    
    
    
    130,056
    
    
    
    104,515Commercial real estate construction
    
    
    134,544
    
    
    
    135,306
    
    
    
    127,224Commercial real estate mortgages
    
    
    521,196
    
    
    
    410,829
    
    
    
    366,601Residential real estate mortgages
    
    
    53,532
    
    
    
    47,947
    
    
    
    46,883938,510
    
    
    
    756,420
    
    
    
    676,233Allowance for loan losses
    
    
    (9,647
    )
    
    
    (7,775
    )
    
    
    (6,965
    )$
    928,863
    
    
    $
    748,645
    
    
    $
    669,268
  03/31/07
    
    
    12/31/06
    
    
    03/31/06Over 90 days past due and still accruing
    
    $
    3,858
    
    
    $
    2,101
    
    
    $
    29Non-accrual loans
    
    
    9,274
    
    
    
    5,560
    
    
    
    1,169Total non-performing loans
    
    
    13,132
    
    
    
    7,661
    
    
    
    1,198Real estate owned
    
    
    3,157
    
    
    
    52
    
    
    
    175Other repossessed assets
    
    
    
    
    
    
    2
    
    
    
    2Other non-performing assets
    
    
    3,157
    
    
    
    54
    
    
    
    177Total non-performing assets
    
    $
    16,289
    
    
    $
    7,715
    
    
    $
    1,375
  Number ofLoans
    
    
    BalanceConsumer loans
    
    
    4
    
    
    $
    377Commercial, financial, & other
    
    
    7
    
    
    
    2,319Commercial real estate mortgages
    
    
    13
    
    
    
    4,090Commercial construction
    
    
    4
    
    
    
    2,174Residential real estate mortgages
    
    
    4
    
    
    
    314Total non-accrual loans
    
    
    32
    
    
    $
    9,274
 26




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##### Table of Contents



Allowance for Loan Losses.
  Quarter Ended
    
    
    Year Ended
    
    
    Quarter Ended03/31/07
    
    
    12/31/06
    
    
    03/31/06Balance, beginning of year
    
    $
    7,775
    
    
    $
    6,808
    
    
    $
    6,808Allowance on loans acquired
    
    
    1,704
    
    
    
    
    
    
    
    Charge-offs:Consumer loans
    
    
    87
    
    
    
    24
    
    
    
    Commercial, financial & other
    
    
    87
    
    
    
    139
    
    
    
    34Commercial real estate construction
    
    
    
    
    
    
    
    
    
    
    Commercial real estate mortgages
    
    
    142
    
    
    
    36
    
    
    
    36Residential real estate mortgages
    
    
    320
    
    
    
    38
    
    
    
    10Recoveries:Consumer loans
    
    
    5
    
    
    
    17
    
    
    
    5Commercial, financial & other
    
    
    174
    
    
    
    218
    
    
    
    72Commercial real estate construction
    
    
    
    
    
    
    
    
    
    
    Commercial real estate mortgages
    
    
    8
    
    
    
    26
    
    
    
    3Residential real estate mortgages
    
    
    
    
    
    
    
    
    
    
    Net charge-offs
    
    
    449
    
    
    
    (24
    )
    
    
    0Additions charged to operations
    
    
    617
    
    
    
    943
    
    
    
    157Balance, end of period
    
    $
    9,647
    
    
    $
    7,775
    
    
    $
    6,965Allowance to total loans
    
    
    1.03
    %
    
    
    1.03
    %
    
    
    1.03
    %Allowance to nonperforming assets
    
    
    59.26
    %
    
    
    100.78
    %
    
    
    505.44
    %Net charge-offs to average loans
    
    
    0.05
    %
    
    
    0.00
    %
    
    
    0.00
    %
 27




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##### Table of Contents



Premises and Equipment.
 Real estate owned.
 Goodwill and other intangible assets.
 GrossCarrying
    
    
    AccumulatedAmount
    
    
    AmortizationCore deposit intangible from acquisition of:Bank of Washtenaw
    
    $
    929
    
    
    $
    326Fidelity Financial Corporation of Michigan
    
    
    8,776
    
    
    
    220Total core deposit intangible
    
    $
    9,705
    
    
    $
    546Borrower relationship intangible from acquisition of:Bank of Washtenaw
    
    $
    1,620
    
    
    $
    246Fidelity Financial Corporation of Michigan
    
    
    3,552
    
    
    
    52Total borrower relationship intangible
    
    $
    5,172
    
    
    $
    298Total intangible assets
    
    $
    14,877
    
    
    $
    844
   28




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##### Table of Contents



Accrued Interest Receivable.
 Other Assets
 29




---



##### Table of Contents



Deposits.
 03/31/07
    
    
    12/31/06
    
    
    03/31/06Non-interest bearing:Demand
    
    $
    99,923
    
    
    $
    53,065
    
    
    $
    60,689Interest bearing:Checking
    
    $
    78,825
    
    
    $
    62,770
    
    
    $
    75,530Money market
    
    
    106,119
    
    
    
    14,289
    
    
    
    22,311Savings
    
    
    35,495
    
    
    
    42,169
    
    
    
    56,784Time, under $100,000
    
    
    152,678
    
    
    
    130,898
    
    
    
    146,537Time, $100,000 and over
    
    
    374,996
    
    
    
    330,025
    
    
    
    270,386748,113
    
    
    
    580,151
    
    
    
    571,548Total deposits
    
    $
    848,036
    
    
    $
    633,216
    
    
    $
    632,237
   03/31/07
    
    
    12/31/06
    
    
    03/31/06Interest bearing checking
    
    $
    1,768
    
    
    $
    889
    
    
    $
    1,004Time, $100,000 and over
    
    
    112,947
    
    
    
    115,362
    
    
    
    92,586Total municipal deposits
    
    $
    114,715
    
    
    $
    116,251
    
    
    $
    93,590
  30




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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 .
 31




---



##### Table of Contents



Capital
   MinimumTo Be Well CapitalizedMinimum for Capital
    
    Under Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of March 31, 2007Total capital(to risk weighted assets)Consolidated
    
    
    118,446
    
    
    
    12.10
    %
    
    
    78,322
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    113,225
    
    
    
    11.59
    %
    
    
    78,136
    
    
    
    8.00
    %
    
    
    97,670
    
    
    
    10.00
    %Tier 1 capital(to risk weighted assets)Consolidated
    
    
    108,799
    
    
    
    11.11
    %
    
    
    39,161
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    103,578
    
    
    
    10.60
    %
    
    
    39,068
    
    
    
    4.00
    %
    
    
    58,602
    
    
    
    6.00
    %Tier 1 capital(to average assets)Consolidated
    
    
    108,799
    
    
    
    10.94
    %
    
    
    39,774
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    103,578
    
    
    
    10.50
    %
    
    
    39,463
    
    
    
    4.00
    %
    
    
    49,329
    
    
    
    5.00
    %As of December 31, 2006Total capital(to risk weighted assets)Consolidated
    
    
    155,252
    
    
    
    19.69
    %
    
    
    63,066
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    85,451
    
    
    
    11.06
    %
    
    
    61,826
    
    
    
    8.00
    %
    
    
    77,283
    
    
    
    10.00
    %Tier 1 capital(to risk weighted assets)Consolidated
    
    
    147,477
    
    
    
    18.71
    %
    
    
    31,533
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    77,676
    
    
    
    10.05
    %
    
    
    30,913
    
    
    
    4.00
    %
    
    
    46,370
    
    
    
    6.00
    %Tier 1 capital(to average assets)Consolidated
    
    
    147,477
    
    
    
    18.12
    %
    
    
    32,555
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    77,676
    
    
    
    10.11
    %
    
    
    30,739
    
    
    
    4.00
    %
    
    
    38,424
    
    
    
    5.00
    %
  32




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##### Table of Contents



PART I    FINANCIAL INFORMATION
 
  Interest Rate Sensitivity Analysis.
   33




---



##### Table of Contents



Interest Rate Sensitivity Period1-90
    
    
    91-365
    
    
    1-5
    
    
    Over(In thousands)
    
    Days
    
    
    Days
    
    
    Years
    
    
    5 Years
    
    
    TotalEarning assetsFederal funds sold
    
    $
    8,956
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    8,956Interest bearing deposits with Banks
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59Mortgage loans held for sale
    
    
    582
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    582Securities available for sale
    
    
    2,247
    
    
    
    7,154
    
    
    
    992
    
    
    
    161
    
    
    
    10,554Federal Home Loan Bank stock
    
    
    1,927
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,927Total loans, net of non-accrual
    
    
    312,649
    
    
    
    63,845
    
    
    
    513,045
    
    
    
    39,697
    
    
    
    929,236Total earning assets
    
    
    326,420
    
    
    
    70,999
    
    
    
    514,037
    
    
    
    39,858
    
    
    
    951,314Interest bearing liabilitiesTotal interest bearing deposits
    
    
    480,859
    
    
    
    204,991
    
    
    
    62,263
    
    
    
    
    
    
    
    748,113Federal Home Loan Bank advances
    
    
    
    
    
    
    5,561
    
    
    
    31,680
    
    
    
    
    
    
    
    37,241Other Borrowings
    
    
    355
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    355Trust preferred securities
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Total interest bearing liabilities
    
    
    491,214
    
    
    
    210,552
    
    
    
    93,943
    
    
    
    
    
    
    
    795,709Net asset (liability) funding gap
    
    
    (164,794
    )
    
    
    (139,553
    )
    
    
    420,094
    
    
    
    39,858
    
    
    $
    155,605Cumulative net asset (liability) funding gap
    
    ($
    164,794
    )
    
    ($
    304,347
    )
    
    $
    115,747
    
    
    $
    155,605
 34




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##### Table of Contents



Liquidity.
   Payments Due By PeriodLess Than
    
    
    1-3
    
    
    3-5
    
    
    Over 51 Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    TotalSecurities sold under
agreements
to repurchase
    
    $
    354
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    354Certificates of deposit
    
    
    465,167
    
    
    
    39,869
    
    
    
    22,399
    
    
    
    239
    
    
    
    527,674Long-term borrowings
    
    
    5,561
    
    
    
    30,828
    
    
    
    852
    
    
    
    
    
    
    
    37,241Lease commitments
    
    
    771
    
    
    
    1,328
    
    
    
    830
    
    
    
    
    
    
    
    2,929Subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    10,000Totals
    
    $
    471,853
    
    
    $
    72,025
    
    
    $
    24,081
    
    
    $
    10,239
    
    
    $
    578,198
  Amount Of Commitment Expiration Per PeriodLess Than
    
    
    1-3
    
    
    3-5
    
    
    Over 51 Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    TotalUnused loan commitments
    
    $
    137,823
    
    
    $
    19,737
    
    
    $
    3,435
    
    
    $
    20,749
    
    
    $
    181,744Standby letters of credit
    
    
    4,965
    
    
    
    4,569
    
    
    
    
    
    
    
    
    
    
    
    9,534Totals
    
    $
    142,788
    
    
    $
    24,306
    
    
    $
    3,435
    
    
    $
    20,749
    
    
    $
    191,278
 35




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##### Table of Contents



Item 4. Controls and Procedures
 Disclosure Controls and Procedures 
 Internal Controls Over Financial Reporting
 36




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##### Table of Contents



PART II    OTHER INFORMATION
 
  (a)
    
    ExhibitsExhibit 31.1 CEO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 31.2 CFO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 32.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.Exhibit 32.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(b)
    
    A Form 8-K Report, dated January 4, 2007 was filed during the quarter ended March 31, 2007.A Form 8-K/A Report, dated January 9, 2007 was filed during the quarter ended March 31,
2007.A Form 8-K Report, dated January 16, 2007 was filed during the quarter ended March 31,
2007.A Form 8-K/A Report, dated January 24, 2007 was filed during the quarter ended March 31,
2007.A Form 8-K/A Report, dated March 14, 2007 was filed during the quarter ended March 31,
2007.
 37




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##### Table of Contents



SIGNATURES
  
  
    
    
    38