Dearborn Bancorp (DEAR) 10-Q 2009 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly period ended June 30, 2009

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                    to                    

Commission file number 000-24478.

DEARBORN BANCORP, INC.

(Exact name of registrant as specified in its charter)

Michigan	38-3073622
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

1360 Porter Street, Dearborn, MI	48124
(Address of principal executive office)	(Zip Code)

(313) 565-5700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero	Accelerated filero	Non-accelerated filerþ	Smaller reporting companyo
		(Do not check if a smaller reporting company)

Indicate by check mark if the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act.

Yeso Noþ

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of July 31, 2009.

Class	Shares Outstanding
Common Stock	7,687,470

DEARBORN BANCORP, INC.

INDEX

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

2

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders
Dearborn Bancorp, Inc.
Dearborn, Michigan

We have reviewed the accompanying condensed consolidated balance sheets of Dearborn Bancorp, Inc. as of June 30, 2009 and 2008 and the related condensed consolidated statements of operation and comprehensive loss for the three and six month periods ended June 30, 2009 and 2008, and the condensed consolidated statements of cash flow for the six month periods ended June 30, 2009 and 2008. These interim financial statements are the responsibility of the Corporation’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated condensed financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2008 and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 20, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2008 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

BKD, LLP
Indianapolis, Indiana
August 14, 2009

3

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(Dollars, in thousands)
	06/30/09			12/31/08			06/30/08
ASSETS
Cash and cash equivalents
Cash and due from banks	$	25,475		$	11,671		$	12,778
Federal funds sold		1,425			4,455			1,301
Interest bearing deposits with banks		18,454			36,876			147
Total cash and cash equivalents		45,354			53,002			14,226
Mortgage loans held for sale		60			1,834			755
Investment securities, available for sale		3,257			84,148			9,381
Federal Home Loan Bank stock		3,698			3,614			3,540
Loans
Loans		882,568			933,269			944,081
Allowance for loan loss		(22,422	)		(14,452	)		(16,638	)
Net loans		859,396			918,817			927,443
Premises and equipment, net		20,784			21,272			21,630
Real estate owned		17,434			9,657			5,411
Goodwill		0			0			34,028
Other intangible assets		4,195			4,592			10,487
Accrued interest receivable		3,512			3,499			3,757
Other assets		31,360			21,483			7,880
Total assets	$	989,800		$	1,121,918		$	1,038,538
LIABILITIES
Deposits
Non-interest bearing deposits	$	83,752		$	81,317		$	82,798
Interest bearing deposits		729,415			857,078			741,124
Total deposits		813,167			938,395			823,922
Other liabilities
Federal funds purchased		0			0			3,600
Securities sold under agreements to repurchase		2,206			2,461			171
Federal Home Loan Bank advances		73,955			65,019			65,401
Accrued interest payable		1,104			1,695			2,047
Other liabilities		1,491			1,037			1,026
Subordinated debentures		10,000			10,000			10,000
Total liabilities		901,923			1,018,607			906,167
STOCKHOLDERS’ EQUITY
Common stock — 20,000,000 shares authorized, 7,687,470 shares at 06/30/09, 7,696,204 shares at 12/31/08; and 8,055,698 shares at 06/30/08		131,866			131,784			133,048
Accumulated deficit		(43,998	)		(28,675	)		(688	)
Accumulated other comprehensive income		9			202			11
Total stockholders’ equity		87,877			103,311			132,371
Total liabilities and stockholders’ equity	$	989,800		$	1,121,918		$	1,038,538

The accompanying notes are an integral part of these condensed consolidated statements.

4

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(In thousands, except share and per share data)	Three Months Ended						Six Months Ended
	06/30/09			06/30/08			06/30/09			06/30/08
Interest income
Interest on loans, including fees	$	13,286		$	14,994		$	27,096		$	31,168
Interest on securities, available for sale		178			109			434			218
Interest on federal funds		6			21			12			36
Interest on deposits with banks		103			1			197			2
Total interest income		13,573			15,125			27,739			31,424
Interest expense
Interest on deposits		5,458			5,874			11,456			12,902
Interest on other borrowings		473			812			1,019			1,805
Interest on subordinated debentures		105			155			210			380
Total interest expense		6,036			6,841			12,685			15,087
Net interest income		7,537			8,284			15,054			16,337
Provision for loan losses		13,610			8,746			24,337			9,632
Net interest income (loss) after provision for loan losses		(6,073	)		(462	)		(9,283	)		6,705
Non-interest income (loss)
Service charges on deposit accounts		375			363			730			743
Fees for other services to customers		37			27			62			66
Gain on the sale of loans		160			51			216			104
Write-down of real estate		(1,506	)		(100	)		(1,860	)		(300	)
Loss on the sale of real estate		(32	)		(469	)		(3	)		(704	)
Gain on the sale of securities		270			—			465			—
Write-down of other assets		—			—			(100	)		—
Other income		125			73			247			147
Total non-interest income (loss)		(571	)		(55	)		(243	)		56
Non-interest expenses
Salaries and employee benefits		3,208			3,284			6,498			6,493
Occupancy and equipment expense		916			950			1,850			1,863
Intangible expense		199			322			397			645
FDIC Assessment		833			174			1,181			348
Advertising and marketing		59			131			129			254
Stationery and supplies		109			171			220			304
Professional services		173			259			364			485
Data processing		238			232			466			457
Defaulted loan expense		926			511			1,687			946
Other operating expenses		442			394			822			871
Total non-interest expense		7,103			6,428			13,614			12,666
Loss before income tax provision		(13,747	)		(6,945	)		(23,140	)		(5,905	)
Income tax benefit		(4,672	)		(2,331	)		(7,816	)		(1,967	)
Net loss	$	(9,075	)	$	(4,614	)	$	(15,324	)	$	(3,938	)
Per share data:
Net loss — basic	$	(1.19	)	$	(0.57	)	$	(2.00	)	$	(0.49	)
Net loss — diluted	$	(1.19	)	$	(0.57	)	$	(2.00	)	$	(0.49	)
Weighted average number of shares outstanding — basic		7,644,207			8,051,037			7,644,198			8,095,379
Weighted average number of shares outstanding — diluted		7,644,207			8,051,037			7,644,198			8,095,379

The accompanying notes are an integral part of these condensed consolidated condensed statements.

5

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited)

(In thousands)	Three Months Ended						Six Months Ended
	06/30/09			06/30/08			06/30/09			06/30/08
Net loss	$	(9,075	)	$	(4,614	)	$	(15,324	)	$	(3,938	)
Other comprehensive loss, net of tax
Unrealized losses on securities
Unrealized holding losses arising during during period		(350	)		(43	)		(757	)		(14	)
Less: reclassification adjustment for gains included in net income		270			—			465			—
Tax effects		27			15			99			5
Other comprehensive loss		(53	)		(28	)		(193	)		(9	)
Comprehensive loss	$	(9,128	)	$	(4,642	)	$	(15,517	)	$	(3,947	)

The accompanying notes are an integral part of these condensed consolidated statements.

6

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

The accompanying notes are an integral part of these condensed consolidated financial statements.

7

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

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

The accompanying notes are an integral part of these condensed consolidated financial statements.

8

DEARBORN BANCORP, INC.
FORM 10-Q (continued)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

A. Accounting and Reporting Policies

The condensed consolidated financial statements of Dearborn Bancorp, Inc. (the “Corporation”) include the consolidation of its only subsidiary, Fidelity Bank (the “Bank”). The accounting and reporting policies of the Corporation are in accordance with accounting principles generally accepted in the United States of America and conform to practice within the banking industry.

The condensed consolidated financial statements of the Corporation as of June 30, 2009 and 2008, and December 31, 2008 and for the three and six month periods ended June 30, 2009 and 2008 reflect all adjustments, consisting of normal recurring items which are in the opinion of management, necessary for a fair presentation of the results for the interim period. The consolidated condensed balance sheet of the Corporation as of December 31, 2008 has been derived from the audited consolidated balance sheet as of that date. The operating results for the three and six month periods ended June 30, 2009 are not necessarily indicative of results of operations for the entire year.

The condensed consolidated financial statements as of June 30, 2009 and 2008, and for the three and six month periods ended June 30, 2009 and 2008 included herein have been prepared by the Corporation, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in interim financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereon included in the Corporation’s 2008 Annual Report on Form 10-K.

Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these material judgments include, but without limitation, changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and determining the fair value of securities and other financial instruments and assessing other than temporary impairments of securities.

9

A. Accounting and Reporting Policies (con’t)

Income (Loss) Per Share

Basic income (loss) per share is net income (loss) divided by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share includes the dilutive effect of additional potential common shares issuable under stock options. Income (loss) per share is restated for all stock splits and dividends through the date of issue of the financial statements.

Factors in the basic and diluted income (loss) per share calculation follow (in thousands, except share and per share data):

	Six Months Ended
	6/30/2009			6/30/2008
Basic
Net income (loss)	$	(15,324	)	$	(3,938	)
Weighted average common shares		7,644,198			8,051,037
Basic earnings (loss) per common share	$	(2.00	)	$	(0.49	)
Diluted
Net income (loss)	$	(15,324	)	$	(3,938	)
Weighted average common shares outstanding for basic earnings per common share		7,644,198			8,051,037
Add: Dilutive effects of assumed exercise of stock options		—			—
Average shares and dilutive potential common shares		7,644,198			8,051,037
Dilutive earnings (loss) per common share	$	(2.00	)	$	(0.49	)

Stock options for 592,777 and 485,993 shares of common stock were not considered in computing diluted earnings per common share for the six months ended June 30, 2009 and 2008, respectively, because they were antidilutive. All share and per share amounts have been adjusted for stock dividends.

10

A. Accounting and Reporting Policies (con’t)

Effect of Newly Issued Accounting Standards

SFAS No. 141 (revised 2007),Business Combinations

The objective of this Statement is to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. This Statement introduces new accounting concepts, and several of these changes have the potential to generate greater earnings volatility, in connection with and after an acquisition. Some of the more significant changes include:

1.	Transaction costs and restructuring charges will now be expensed.
2.	The accounting for certain assets acquired and liabilities assumed will change significantly. The most significant to the Corporation being that allowance for loan losses at acquisition date will be eliminated.
3.	Contingent consideration will be measured at fair value until settled.
4.	Equity issued in an acquisition will be valued at the closing date, as opposed to the announcement date.
5.	Material adjustments made to the initial acquisition will be recorded back to the acquisition date.

The adoption of this statement did not have a material impact on the Corporation’s consolidated financial statements.

SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51

This statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Before this statement was issued, limited guidance existed for reporting noncontrolling interests. As a result, considerable diversity in practice existed. So-called minority interests were reported in the consolidated statement of financial position as liabilities or in the mezzanine section between liabilities and equity. This statement improves comparability by eliminating that diversity. The adoption of this statement did not have a material impact on the Corporation’s consolidated financial statements.

11

A. Accounting and Reporting Policies (con’t)

SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities—An Amendment FASB Statement No. 133

This Statement was issued in March 2008 and amends and expands the disclosure requirements of SFAS No. 133 to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS No. 133 and its related interpretations and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements.The adoption of this statement did not have a material impact on the Corporation’s consolidated financial statements.

SFAS No. 165,Subsequent Events

The FASB has issued FASB Statement No. 165, Subsequent Events. Statement 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, Statement 165 provides:

The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements;

The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and

The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

Statement 165 was effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. The adoption of this statement did not have a material impact on the Corporation’s consolidated financial statements.

12

A. Accounting and Reporting Policies (con’t)

SFAS No. 167,Amendments to FASB Interpretation No. 46(R)and SFAS No. 166,Accounting for Transfers of Financial Assets- The FASB has issued the following two standards which change the way entities account for securitizations and special-purpose entities:

Statement 166 is a revision to FASB Statement No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures.

Statement 167 is a revision to FASB Interpretation No. 46 (Revised December 2003),Consolidation of Variable Interest Entities, and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance.

The new standards will require a number of new disclosures. Statement 167 will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. Statement 166 enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity’s continuing involvement in transferred financial assets.

The Federal Reserve is reviewing regulatory capital requirements associated with the adoption of the new accounting standards by financial institutions. In conducting this review, the Federal Reserve is considering a broad range of factors including the maintenance of prudent capital levels, the record of recent bank experiences with off-balance sheet vehicles, and the results of the recent Supervisory Capital Assessment Program (SCAP). As part of the SCAP, participating banking organizations’ capital adequacy was assessed using assumptions consistent with standards ultimately included in FAS 166 and FAS 167.

13

A. Accounting and Reporting Policies (con’t)

Statements 166 and 167 will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. Early application is not permitted. The Corporation does not expect this to have a material impact on the Corporation’s financial statements.

SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a Replacement of FASB Statement No. 162.” SFAS 168 replaces SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles” and establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the Codification carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative. SFAS 168 will be effective for the Corporation’s financial statements for periods ending after September 15, 2009. SFAS 168 is not expected have a significant impact on the Corporation’s financial statements.

FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 became effective on January 1, 2009. See Note 1 — Significant Accounting Policies.

FSP SFAS. 132R-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” FSP SFAS 132R-1 provides guidance related to an employer’s disclosures about plan assets of defined benefit pension or other post-retirement benefit plans. Under FSP SFAS 132R-1, disclosures should provide users of financial statements with an understanding of how investment allocation decisions are made, the factors that are pertinent to an understanding of investment policies and strategies, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets. The disclosures required by FSP SFAS 132R-1 will be included in the Corporation’s financial statements beginning with the financial statements for the year-ended December 31, 2009.

14

A. Accounting and Reporting Policies (con’t)

FASB Staff Position (FSP) FAS 141(R)-1,Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies

This FSP amends and clarifies FAS 141(R),Business Combinations, regarding the initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. This FSP eliminates the distinction between contractual and noncontractual contingencies discussed in FAS 141(R), specifies whether contingencies should be measured at fair value or in accordance with FAS 5, provides application guidance on subsequent accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies and establishes new disclosure requirements. This FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this staff position did not have a material impact on the Corporation’s consolidated financial statements.

FSP FAS 157-4—Determining Fair Value When the Volume and Level of Activity for The Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

This FSP, issued on April 9, 2009, provides additional guidance for estimating fair value in accordance with FASB Statement No. 157,Fair Value Measurements,when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. Even if there has been a significant decrease in the volume and level of activity regardless of valuation technique, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009 only if FSP FAS 115-2 and FAS 124-2 and FSP FAS 107-1 and APG 28-1 are adopted concurrently. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. The adoption of this staff position did not have a material impact on the Corporation’s consolidated financial statements.

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A. Accounting and Reporting Policies (con’t)

FSP No. 115-2 and FAS 124-2—Recognition and Presentation of Other-Than-Temporary Impairments

Issued on April 9, 2009, this FSP amends FASB Statement No. 107,Disclosures about Fair Value of Financial Instrumentsand APB Opinion No. 28,Interim Financial Reporting,to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009 only if FSP FAS 157-4 and FSP FAS 107-1 and APG 28-1 are adopted concurrently. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. The adoption of this staff position did not have a material impact on the Corporation’s consolidated financial statements.

FSP No. 107-1 and APG 28-1—Interim Disclosures about Fair Value of Financial Instruments

This FSP issued on April 9, 2009 amends the other-than-temporary guidance in U.S. generally accepted accounting principles for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities and does not require disclosures for earlier periods presented for comparative purposes at initial adoption. Effective for interim reporting periods ending after June 15, 2009, early adoption is permitted for periods ending after March 15, 2009 only if FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2 are adopted concurrently. The adoption of this staff position did not have a material impact on the Corporation’s consolidated financial statements.

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B. Securities Available For Sale

The amortized cost and fair value of securities available for sale are as follows (in thousands):

	June 30, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
US Government sponsored agency securities	$	3,098	$	10		—	$	3,108
Mortgage backed securities		145		4		—		149
Totals	$	3,243	$	14	$	—	$	3,257

	December 31, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
US Government sponsored agency securities	$	21,175	$	226	$	(2	)	$	21,399
Corporate bonds		13,185		54		(4	)		13,235
Municipal securities		1,303		28		—			1,331
Mortgage backed securities		179		4		—			183
Money market mutual funds		48,000		—		—			48,000
Totals	$	83,842	$	312	$	(6	)	$	84,148

The amortized cost and fair value of securities available for sale at June 30, 2009 by contractual maturity are shown below (in thousands):

	Amortized		Fair
	Cost		Value
Due in less than one year		1,000		1,000
Due in one year through five years		2,098		2,108
Mortgage backed securities		145		149
Totals	$	3,243	$	3,257

The entire portfolio has a net unrealized gain of $14,000 at June 30, 2009. There were no unrealized losses on securities, available for sale at June 30, 2009. The Corporation does not hold any securities in the “Held to Maturity” category nor does the Corporation hold or utilize derivatives.

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C. Loans

The aggregate balance in impaired loans are as follows (in thousands):

	06/30/09		12/31/08		06/30/08
Impaired loans with no allocated allowance for loan losses	$	104,324	$	71,961	$	58,386
Impaired loans with allocated allowance for loan losses		—		26,908		35,607
Total	$	104,324	$	98,869	$	93,993
Amount of the allowance for loan loss allocated	$	—	$	5,273	$	8,102

Regulatory requirements, documented in the in the discussion of Impaired Loans in the Glossary of the FFIEC Call Report Instructions dictate that any collateral deficiency on impaired loans that are collateral dependent must be immediately charged off. A collateral deficiency exists where the loan balance exceeds the value of the underlying collateral. As of June 30, 2009, the collateral deficiency of all collateral dependent impaired loans has been charged off, resulting in no allocated allowances on impaired loans.

D. Incentive Stock Plans

Incentive stock awards have been granted to officers and employees under two Incentive Stock Plans. The first plan is the 1994 Stock Option Plan. Options to buy common stock have been granted to officers and employees under the 1994 Stock Option Plan, which provides for issue of up to 738,729 shares. Exercise price is the market price at date of grant. The maximum option term is ten years, and options vest fully after six months from the date of grant.

There was no option activity during the six months ended June 30, 2009. For the options outstanding at June 30, 2009, the range of exercise prices was $4.18 to $14.65 per share with a weighted-average remaining contractual term of 2.5 years. At June 30, 2009, 360,401 options were exercisable at weighted average exercise price of $8.65 per share. There were no options exercised during the six months ended June 30, 2009. There was no intrinsic value at June 30, 2009.

During 2005, the Corporation initiated the 2005 Long-Term Incentive Plan. Under this plan, up to 347,248 shares may be granted to officers and employees of the Bank. This plan provides that stock awards may take the form of any combination of options, restricted shares, restricted share units or performance awards.

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D. Incentive Stock Plans (con’t)

The administration of the plan, including the granting of awards and the nature of those awards is determined by the Corporation’s Compensation Committee. The Corporation’s Board of Directors approved grants of stock options and restricted stock in 2005, 2006 and 2008. The awards have a term of ten years and typically vest fully three years from the grant date. In order for vesting to occur with some grants, the Corporation must meet certain performance criteria over the vesting period. The expected compensation cost of the 2005 plan is being calculated assuming the Corporation’s attainment of “target” performance goals over the vesting period of the awards. The actual cost of these awards could range from zero to 100% of the currently recorded compensation cost, depending on the Corporation’s actual performance. The awards granted in 2005 and 2006 did have such performance criteria. The awards granted in 2008 did not have performance criteria.

Stock Options Granted — Stock options were awarded to officers in 2005, 2006 and 2008. The incentive stock options were granted with exercise prices equal to market prices on the day of grant. At June 30, 2009, there were stock options outstanding for 182,113 shares with a weighted average exercise price of $4.96 per share. At June 30, 2009, stock options for 70,846 shares were vested fully.

The Corporation recognized stock option compensation expense of $39,000 and $13,000 during the six months ended June 30, 2009 and 2008, respectively. Compensation cost of $69,000 and $62,000 is expected to be recognized during 2009 and 2010, respectively.

Restricted Stock Grants — Restricted stock was awarded to officers in 2005, 2006 and 2008. The restricted stock is eligible to vest three years from grant date. Upon full vesting, restricted shares are transferred to common shares. At June 30, 2009, there were 41,530 shares of restricted stock outstanding.

The Corporation recognized restricted stock compensation expense of $44,000 and $28,000, respectively during the six months ended June 30, 2009. Compensation cost of $75,000 and $62,000 is expected to be recognized during 2009 and 2010, respectively.

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E. Accumulated Other Comprehensive Income (Loss)

Other comprehensive loss components and related taxes for the six months ended June 30, 2009 were as follows:

Net unrealized losses on securities available for sale	$	(292	)
Tax effects		99
Other comprehensive loss	$	(193	)

The components of accumulated other comprehensive income (loss) included in stockholders’ equity at June 30, 2009 are as follows:

Net unrealized gains on securities available for sale	$	14
Tax effects		5
Other comprehensive income	$	9

F.	Fair Value of Assets and Liabilities
	Effective 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 liabilities
Level 2 —	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

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F. Fair Value of Assets and Liabilities ( con’t)

Level 2 securities include U.S. agency and U.S. government sponsored enterprise mortgage-backed securities. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping and matrix pricing. In addition, model processes, such as an option adjusted spread model is used to develop prepayment and interest rate scenarios for securities with prepayment features.

Level 3 —

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to our valuation hierarchy.

Securities available for sale

Fair values of securities, available for sale are estimated by a third party using inputs that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy.

The following table presents the fair value measurements of the Corporation’s assets and liabilities recognized in the accompanying balance sheet measured at fair value on a recurring basis and the level within the SFAS 157 fair value hierarchy in which the fair value measurements fall at June 30, 2009, December 31, 2008 and June 30, 2008 (in thousands):

At 6/30/2009			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
US Government sponsored agency securities	$	3,108	$	—	$	3,108	$	—
Mortgage backed securities		149		—		149		—
Securities, available for sale	$	3,257	$	—	$	3,257	$	—

At 12/31/2008			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Securities, available for sale	$	84,148	$	48,000	$	36,148	$	—

At 6/30/2008			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Securities, available for sale	$	9,381	$	6,829	$	2,552	$	—

Impaired loans and other real estate owned

Fair value adjustments for impaired and non-accrual loans typically occur when there is evidence of impairment. Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. The Company measures fair value based on the value of the collateral securing the loans. Collateral may be in the form of real estate or personal property including equipment and inventory. The value of the collateral is determined based on internal estimates as well as third party appraisals or non-binding broker quotes. These measurements were classified as Level 3. The fair value of the Company’s other real estate owned is determined using Level 3 inputs, which include current and prior appraisals and estimated costs to sell.

The following table presents the fair value measurements of the Corporation’s assets and liabilities recognized in the accompanying balance sheet measured at fair value on a non-recurring basis and the level within the SFAS 157 fair value hierarchy in which the fair value measurements fall at June 30, 2009, December 31, 2008 and June 30, 2008 (in thousands):

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F. Fair Value of Assets and Liabilities ( con’t)

At 6/30/2009			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Loans	$	37,219	$	—	$	—	$	37,219
Other real estate	$	17,434	$	—	$	—	$	17,434

At 12/31/2008			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Loans	$	41,907	$	—	$	—	$	41,907

At 6/30/2008			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Loans	$	27,672	$	—	$	—	$	27,672

The carrying amounts and estimated fair value of principle financial assets and liabilities were as follows:

	At June 30, 2009				At December 31, 2008
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets:
Cash and cash equivalents	$	45,354	$	45,354	$	53,002	$	53,002
Mortgage loans held for sale		60		61		1,834		1,334
Securities available for sale		3,257		3,257		84,148		84,148
Federal Home Loan Bank Stock		3,698		3,698		3,614		3,614
Loans, net		882,568		883,395		933,269		934,826
Accrued interest receivable		3,512		3,512		3,499		3,499
Liabilities:
Deposits		813,167		818,051		938,395		945,017
Securities sold under agreements to repurchase		2,206		2,206		2,461		2,461
Federal Home Loan Bank advances		73,955		74,778		65,019		66,390
Subordinated debentures		10,000		10,005		10,000		10,028
Accrued interest payable		1,104		1,104		1,695		1,695

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F.

Fair Value of Assets and Liabilities ( con’t)

Carrying amount is the estimated fair value for cash and cash equivalents, Federal Home Loan Bank stock, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently or fully. Security fair values are based on market prices or dealer quotes and, if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. The fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements, and is not considered material to this presentation.

G. Allowance for Loan Losses

The allowance for loan losses was $22,422,000 at June 30, 2009 compared to $14,452,000 at December 31, 2008, an increase of $7,970,000 or 55%. The increase was primarily due to net charge-offs of $16,367,000 and the continuing deterioration of the underlying collateral of the Bank’s non-performing loans. Regulatory requirements, documented in the in the discussion of Impaired Loans in the Glossary of the FFIEC Call Report Instructions dictate that any collateral deficiency on impaired loans that are collateral dependent must be immediately charged off. A collateral deficiency exists where the loan balance exceeds the value of the underlying collateral. As of June 30, 2009, the collateral deficiency of all collateral dependent impaired loans has been charged off.

The decision to recognize these charge-offs was based primarily on the continued decline in the underlying value of our collateral and the accelerating decline during the second quarter of 2009 in the economic environment in Southeastern Michigan. This decline in economic conditions is heavily impacted by conditions and events that have recently impacted the automotive industry during the first half of 2009, including the recent bankruptcy of two major automotive manufacturers and resulting shut down of production and layoffs of employees. These events will have a negative impact on the residential real estate and commercial real estate markets in the Bank’s market area. These conditions have led to an increase in the Bank’s classified assets during 2009. Management has recognized this trend in our analysis of the allowance for loan losses at June 30, 2009. The allowance for loan losses was based upon management’s assessment of relevant factors, including loan growth, types and amounts of non-performing loans, historical and anticipated loss experience on such types of loans, and current economic conditions.

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G. Allowance for Loan Losses (con’t)

     The following is an analysis of the allowance for loan losses (in thousands):

	Six Months						Six Months
	Ended			Year Ended			Ended
	06/30/09			12/31/08			06/30/08
Balance, beginning of year	$	14,452		$	10,617		$	10,617
Charge-offs:
Consumer loans		539			318			176
Commercial, financial & other		2,490			4,304			3,127
Land development loans — residential property		5,308			1,777			—
Land development loans — non residential property		2,356			—			—
Commercial real estate construction — residential property		1,176			1,635			58
Commercial real estate construction — non residential property		430			192			—
Commercial real estate mortgages		3,708			2,446			190
Residential real estate mortgages		621			296			106
Recoveries:
Consumer loans		11			19			11
Commercial, financial & other		189			117			31
Land development loans — residential property		28			33			—
Land development loans — non residential property		—			—			—
Commercial real estate construction — residential property		—			—			—
Commercial real estate construction — non residential property		—			3			—
Commercial real estate mortgages		26			21			4
Residential real estate mortgages		7			4			—
Net charge-offs		16,367			10,771			3,611
Provision for loan losses		24,337			14,606			9,632
Balance, end of period	$	22,422		$	14,452		$	16,638
Allowance to total loans		2.54	%		1.55	%		1.76	%

H. Income Taxes

The federal tax provision consists of the following (in thousands):

	6/30/09			12/31/08
Current	$	(3,505	)	$	(2,370	)
Deferred		(4,311	)		(14,117	)
	$	(7,816	)	$	(16,487	)

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H. Income Taxes (con’t)

Deferred tax assets and liabilities are due to the following at December 31, (in thousands):

	6/30/09			12/3108
Deferred tax assets
Allowance for loan losses	$	7,623		$	4,913
Net operating loss carryforward		1,496			—
Goodwill and other intangibles		11,555			11,877
Capital loss carryforward		251			251
Valuation allowance on capital loss carryforward		(251	)		(251	)
Non accrual interest income		100			92
Writedowns on other real estate owned		990			462
Amortization of deferred issue costs		80			81
Other		78			63
Total deferred tax assets		21,922			17,488
Deferred tax liabilities
Premises and equipment		(351	)		(300	)
Prepaid expenses		(253	)		(259	)
Unrealized losses on securities available for sale		(104	)		(104	)
Deferred loan fees and costs		(99	)		(73	)
Other		(118	)		(66	)
Total deferred tax liabilities		(925	)		(802	)
Net deferred tax asset (liability)	$	20,997		$	16,686

The increase in the deferred tax assets during 2009 is primarily due to net charge-offs during the period. These charge-offs are primarily on the continued decline in the underlying value of our collateral and the accelerating decline during the second quarter of 2009 in the economic environment in Southeastern Michigan. This decline in economic conditions is heavily impacted by conditions and events that have recently impacted the automotive industry during the first half of 2009, including the recent bankruptcy of two major automotive manufacturers and resulting shut down of production and layoffs of employees. The goodwill and other intangible assets acquired during 2004 and 2007 are being amortized over 15 years for tax purposes and are tax deductible, but the goodwill is not being amortized for book purposes. The impairment of goodwill and partial impairment of other intangible assets generated a deferred tax asset of $13,464,000 during 2008.

The recoverability of the deferred tax asset, which is primarily due to the future deductability of goodwill, core deposit intangible and the allowance for loan losses, is contingent upon future book income. The Corporation believes that future income will support this deferred tax asset and believes that no valuation allowance is necessary.

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H. Income Taxes (con’t)

There were no unrecognized tax benefits at December 31, 2008, and the Corporation does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.

Effective tax rates differ from the federal statutory rate of 34% applied to income before income taxes due to the following:

	6/30/09			12/31/08
Federal income tax rate		34	%		34	%
Effect of capital loss carryforward valuation allowance		—	%		—	%
Other, net		—	%		—	%
Effective tax rate		34	%		34	%

The Corporation is no longer subject to examination by the Internal Revenue Service for years before 2007. As of June 30, 2009, the Corporation had approximately $4,400,000 of federal tax loss carryforward available to offset future federal income tax, which will begin to expire in 2029.

I. Subsequent Events

Subsequent events have been evaluated through August 14, 2009, which is the date the financial statements were available to be issued.

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ITEM 2. — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis are intended to address significant factors affecting the financial condition and results of operations of the Corporation. The discussion provides a more comprehensive review of the financial position and operating results than can be obtained from a reading of the financial statements and footnotes presented elsewhere in this report.

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on current expectations. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “projects,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Actual results and outcomes may materially differ from what is expressed in forward-looking statements. Dearborn Bancorp undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise.

Future Factors include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies, trends in customer behavior as well as their ability to repay loans; changes in local real estate values; changes in the national and local economy; and other factors, including risk factors disclosed from time to time in filings made by Dearborn Bancorp with the Securities and Exchange Commission. These are representative of the Future Factors and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

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Company Overview

Dearborn Bancorp, Inc. was incorporated as a Michigan business corporation on September 30, 1992. The Corporation was formed to acquire all of the Bank’s issued and outstanding stock and to engage in the business of a bank holding corporation under the Bank Holding Company Act of 1956, as amended (the “Act”).

Community Bank of Dearborn (the “Bank”), a Michigan banking corporation, commenced business on February 28, 1994 in Dearborn, Michigan. On April 30, 2007, Community Bank of Dearborn was renamed Fidelity Bank. Management believes that its new name, Fidelity Bank represents a more accurate portrayal to our customers and prospects of the financial products and services offered by the Bank and the Bank’s market area.

The Bank is the only commercial bank headquartered in Dearborn, Michigan and offers a full line of loan and deposit products and services. The Bank offers excellent customer service to its loan and deposit customers and maintains strong relationships with the communities served by the Bank. The Bank emphasizes strong loan quality, excellent customer service and efficient operations in order to maximize profitability and shareholder value.

Subsequent to the commencement of business in Dearborn, Michigan in 1994, the Bank opened five additional offices in Wayne County, Michigan. Since 2001, the Bank opened two offices in Macomb County, Michigan and in 2003, the Bank opened an office in Oakland County, Michigan.

In 2004, the Corporation acquired the Bank of Washtenaw from Pavillion Bancorp. The Bank of Washtenaw’s three banking offices, all of which are located in Washtenaw County, Michigan were successfully consolidated into the Bank.

In 2007, the Corporation acquired Fidelity Financial Corporation of Michigan (Fidelity), a commercial bank with seven offices in Oakland County, Michigan. The acquisition has significantly expanded the Bank’s presence in Oakland County, Michigan. Management believes that the acquisition will be beneficial to the Bank’s customers and the Corporation’s shareholders. Additionally, the Bank opened a full service banking office in Shelby Township, Michigan on April 30, 2007. The Bank currently operates seventeen banking offices in Wayne, Macomb, Oakland and Washtenaw Counties, Michigan.

The Bank has also formed two subsidiaries that offer additional or specialized services to the Bank’s customers. The Bank’s subsidiaries, their formation date and the type of services offered are listed below:

Date Formed	Name	Services Offered
August 1997	Community Bank Insurance Agency, Inc.	Limited insurance related activities
March 2002	Community Bank Audit Services, Inc.	Internal auditing and compliance services for financial institutions

The date opened, branch location and branch type of each branch is listed on the following page:

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Date Opened	Location	Type of office
February 1994	22290 Michigan Avenue	Full service retail branch with ATM
	Dearborn, Michigan 48123	Regional lending center
December 1995	24935 West Warren Avenue	Full service retail branch
	Dearborn Heights, Michigan 48127
August 1997	44623 Five Mile Road	Full service retail branch with ATM
	Plymouth, Michigan 48170
May 2001	1325 North Canton Center Road	Full service retail branch with ATM
	Canton, Michigan 48187
December 2001	45000 River Ridge Drive	Regional lending center
	Clinton Township, Michigan 48038
November 2002	19100 Hall Road	Full service retail branch with ATM
	Clinton Township, Michigan 48038
February 2003	12820 Fort Street	Full service retail branch with ATM
	Southgate, Michigan 48195
May 2003	3201 University Drive, Suite 180	Full service retail branch
	Auburn Hills, Michigan 48326
October 2004	450 East Michigan Avenue	Full service retail branch with ATM
	Saline, MI 48176
October 2004	250 West Eisenhower Parkway	Full service retail branch with ATM
	Ann Arbor, MI 48103	Regional lending certer
October 2004	2180 West Stadium Blvd.	Full service retail branch with ATM
	Ann Arbor, MI 48103
December 2004	1360 Porter Street	Loan production office
	Dearborn, MI 48123	Regional lending center
January 2007	1040 E. Maple	Full service retail branch with ATM
	Birmingham, MI 48009	Regional lending certer
January 2007	3681 W. Maple	Full service retail branch with ATM
	Birmingham, MI 48301
January 2007	30700 Telegraph	Full service retail branch with ATM
	Bingham Farms, MI 48025
January 2007	20000 Twelve Mile Road	Full service retail branch with ATM
	Southfield, MI 48076
April 2007	7755 23 Mile Road	Full service retail branch with ATM
	Shelby Township, MI 48075

The Corporation has realized substantial asset growth from the formation of the Corporation through December 31, 2008, depending on the economic and competitive environment.

29

Historically, the Bank’s growth has been realized through the growth of the loan portfolio. More specifically, the expansion of our commercial banking department has been a primary element in the Bank’s asset growth through December 31, 2007. The Corporation’s growth since its inception has been funded primarily by deposits. During 2009, the Corporation, total assets have declined due to management of the Bank’s non-performing assets and the liquidation of the Bank’s participation in a wholesale money market deposit program.

Due to losses experienced during 2008 and the first half of 2009, the Bank’s capital position has declined to “adequately capitalized”, as defined by the FDIC Regulation Part 325.103 at June 30, 2009 from “well-capitalized” at December 31, 2008. Management intends to raise sufficient capital during 2009 to return the Bank to well-capitalized status and provide sufficient capital for the Corporation. Management will consider various sources of capital and estimates that it needs to raise between $20 million and $50 million in capital during 2009.

The Corporation’s earnings depend primarily on net interest income. Management strives to maximize net interest income through monitoring the economic and competitive environment and making appropriate adjustments in the characteristics and pricing of our products and services.

Other factors that contribute significantly to our earnings are the maintenance of asset quality and efficient operations. Management continually monitors the quality of the loan portfolio and the impact of the economic and competitive environment and works to maintain asset quality.

The Bank’s market area consists primarily of the Metropolitan Detroit area. This is a large real estate market and the Bank’s loan portfolio accounts for less than one percent of this market. The Detroit real estate market has been negatively impacted by the unfavorable economic conditions in the State of Michigan. The Bank has maintained strong underwriting guidelines and utilizes a diligent loan review process.

The Corporation recorded a net loss of $9,075,000 and $15,324,000 for the three and six month periods ended June 30, 2009, respectively. The primary factor affecting net income was the recording of $13,610,000 and $24,337,000 to the provision for loan loss for the three and six month periods ended June 30, 2009. The provision for loan loss was due to net charge-offs of $9,820,000 and $16,367,000 for the three and six month periods ended June 30, 2009, respectively and the continued deterioration in the underlying collateral of the Bank’s non-performing assets. Another significant factor was the cost related to real estate owned, which included defaulted loan expense of $926,000 and $1,687,000 and write-downs to real estate owned of $1,506,000 and $$1,860,000 during the three month and six months ended June 30, 2009, respectively.

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Results of Operations

The Corporation reported net losses of ($9,075,000) and ($15,324,000) for the three and six month periods ended June 30, 2009, compared to net losses of ($4,614,000) and ($3,938,000) for the same periods in 2008, a decrease of $4,461,000 for the three month period and $11,386,000 for the six month period. The decrease in net income was primarily due to the increase in the provision for loan loss, the decline in net interest income due to the elevated levels of non-performing loans and the increased costs related to real estate owned.

Net Interest Income

2009 Compared to 2008.As noted on the two charts on the following pages, net interest income for the three and six month periods ended June 30, 2009 was $7,537,000 and $15,054,000, compared to $8,284,000 and $16,337,000 for the same periods ended June 30, 2008, a decrease of $747,000 or 9% for the three month period and $1,283,000 or 8% for the six month period. This decrease was caused primarily by the decreasing spread between interest earning assets and interest bearing liabilities. The Corporation’s interest rate spread was 2.48% and 2.63% for the three and six months periods ended June 30, 2009 compared to 2.95% and 2.86% for the same periods in 2008. The Corporation’s interest rate margin was 3.01% and 2.97% for the three and six months periods ended June 30, 2009 compared to 3.45% and 3.40% for the same periods in 2008. The decline in the Corporation net interest spread and net interest margin was primarily due to the decline in the Bank’s yield on earning assets, which was primarily due to the impact of the increasing amount of non-performing loans.

Average Balances, Interest Rates and Yields.Net interest income is affected by the difference (“interest rate spread”) between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities and the relative amounts of interest-bearing liabilities and interest-earning assets. When the total of interest-earning assets approximates or exceeds the total of interest-bearing liabilities, any positive interest rate spread will generate net interest income. Financial institutions have traditionally used interest rate spreads as a measure of net interest income. Another indication of an institution’s net interest income is its “net yield on interest-earning assets” or “net interest margin,” which is net interest income divided by average interest-earning assets.

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The following table sets forth certain information relating to the Corporation’s consolidated average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented. During the periods indicated, non-accruing loans, if any, are included in the loan category.

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

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

Rate/Volume Analysis.The following table analyzes net interest income in terms of changes in the volume of interest-earning assets and interest-bearing liabilities and changes in yields and rates. The table reflects the extent to which changes in the interest income and interest expense are attributable to changes in volume (changes in volume multiplied by prior year rate) and changes in rate (changes in rate multiplied by prior year volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately to changes due to volume and changes due to rate.

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

Provision for Loan Losses

2009 Compared to 2008.The provision for loan losses was $13,610,000 and $24,337,000 for the three and six month periods ended June 30, 2009, compared to $8,746,000 and $9,632,000 for the same period in 2008, an increase of $4,864,000 or 56% for the three month period and $14,705,000 or 152% for the six month period. The increase is primarily due to net charge-offs of $16,367,000 during the period and the continued deterioration of the underlying collateral for the Bank’s non-performing loans, which are primarily due to the decline in economic conditions in Southeastern Michigan. This decline in economic conditions is heavily impacted by conditions and events that have recently impacted the automotive industry during the first half of 2009, including the recent bankruptcy of two major automotive manufacturers and resulting shut down of production and layoffs of employees. These events will have a negative impact on the residential real estate and commercial real estate markets in the Bank’s market area. These conditions have led to an increase in the Bank’s classified assets during 2009. Management has recognized this trend in our analysis of the allowance for loan losses at June 30, 2009.

Regulatory requirements, documented in the in the discussion of Impaired Loans in the Glossary of the FFIEC Call Report Instructions dictate that any collateral deficiency on impaired loans that are collateral dependent must be immediately charged off. A collateral deficiency exists where the loan balance exceeds the value of the underlying collateral. As of June 30, 2009, the collateral deficiency of all collateral dependent impaired loans has been charged off.

Net charge-offs of $12,873,000 or 79% of year-to-date net charge-offs were based on current valuations of the underlying collateral during these challenging economic conditions. These valuations are as of a certain date and there is a possibility that the valuation of this collateral will improve as economic conditions improve.

The provision for loan losses for the three month period ended June 30, 2009 is based on the internal analysis of the adequacy of the allowance for loan losses. The provision for loan losses was based upon management’s assessment of relevant factors, including types and amounts of non-performing loans, historical loss experience on such types of loans, and current economic conditions.

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Non-interest Income (Loss)

2009 Compared to 2008.Non-interest income (loss) was ($571,000) and ($243,000) for the three and six month periods ended June 30, 2009, compared to ($55,000) and $56,000 for the same periods in 2008. The decrease in non-interest income was primarily due to the write-down of other real estate during 2009 and partially offset by the gain recognized on the sale of securities during the period.

When these transactions related to real estate owned, other assets and securities are excluded, non-interest income for the three and six month periods ended June 30, 2009 amounts to $697,000 and $1,255,000 compared to $514,000 and $1,060,000 during the same period in 2008, an increase of $183,000 or 36% for the three month period and $195,000 or 18% for the six month period. This increase is primarily caused by the increase in other income.

Non-interest Expense

2009 Compared to 2008.Non-interest expense was $7,103,000 and $13,614,000 for the three and six month periods ended June 30, 2009, compared to $6,428,000 and $12,666,000 for the same periods in 2008, an increase of $675,000 or 10% for the three month period and $948,000 or 7% for the six month period. The increase was primarily due to defaulted loan expense and the FDIC assessment. Defaulted loan expense amounted to $926,000 and $1,687,000 during the three and six month periods ended June 30, 2009 compared to $511,000 and $946,000 during the same periods in 2008, an increase of $415,000 or 81% for the three month period and $741,000 or 78% for the six month period. This increase in defaulted loans expense was primarily due to the payment of property taxes, insurance, legal expenses and maintenance in 2009 for real estate owned. The FDIC assessment amounted to $833,000 and $1,181,000 during the three and six month periods ended June 30, 2009 compared to $$174,000 and $348,000 during the same period in 2008, an increase of $659,000 or 379% for the three month period and $833,000 or 239% for the six month period. The increase in the FDIC assessment was due to the increased amount of the Bank’s annual assessment amount and the payment of a special assessment announced by the FDIC during the second quarter of 2009.

The largest component of non-interest expense was salaries and employee benefits which amounted to $3,208,000 and $6,498,000 for the three and six month periods ended June 30, 2009, compared to $3,284,000 and $6,493,000 for the same period in 2008, a decrease of $76,000 for the three month period and an increase of $5,000 for the six month period. As of June 30, 2009, the number of full time equivalent employees was 205 compared to 218 as of June 30, 2008.

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Income Tax Provision

2009 Compared to 2008.The income tax benefit was ($4,672,000) and ($7,816,000) for the three and six month periods ended June 30, 2009, compared to ($2,331,000) and ($1,967,000) for the same periods in 2008, an increase in the benefit of ($2,341,000) or 100% for the three month period and ($5,849,000) or 297% for the six month period.

Comparison of Financial Condition at June 30, 2009 and December 31, 2008

Assets.Total assets at June 30, 2009 were $989,900,000 compared to $1,121,918,000 at December 31, 2008, a decrease of $132,018,000 or 12%. The decrease was primarily due to decreases in securities, available for sale and loans and partially offset by the increases in cash and cash equivalents and real estate owned.

Federal Funds Sold.Total federal funds sold at June 30, 2009 were $1,425,000 compared to $4,455,000 at December 31, 2008, a decrease of $3,030,000 or 68%. The decrease in federal funds is the result of normal fluctuations in overnight operating balances that are carried at various correspondent banks.

Interest bearing deposits with banks.Total interest bearing deposits with banks at June 30, 2009 were $18,454,000 compared to $36,876,000 at December 31, 2008, a decrease of $18,422,000 or 50%. The decrease is primarily due to the Bank’s decision to liquidate a wholesale money market deposit program. Interest bearing deposits with banks consists primarily of time deposits from other banks. These time deposits are fully insured and mature in less than fifteen months.

Mortgage Loans Held for Sale.Total mortgage loans held for sale at June 30, 2009 were $60,000 compared to $1,834,000 at December 31, 2008, a decrease of $1,774,000 or 97%. This increase was a result of the decrease in the level of residential real estate mortgage loans waiting to be purchased by mortgage correspondents.

Securities — Available for Sale.Total securities, available for sale, at June 30, 2009 were $3,257,000 compared to $84,148,000 at December 31, 2008, a decrease of $80,891,000 or 96%. The decrease is the result of the re-deployment of $30,000,000 from securities, available for sale to interest bearing deposits with banks and the sale of twenty-seven investment securities with a par value of $48,290,000. These funds were utilized to liquidate a wholesale money market deposit program.

Please refer to Note B of the Notes to Consolidated Financial Statements for the amortized cost and estimated market value of securities, available for sale. The entire portfolio has a net unrealized gain of $14,000 at June 30, 2009. The unrealized gain, net of tax is reflected by an adjustment to stockholders’ equity.

Federal Home Loan Bank Stock.Federal Home Loan Bank stock was valued at $3,698,000 at June 30, 2009, compared to $3,614,000 at December 31, 2008, an increase of $84,000 or 2%. The increase was due to the purchase of Federal Home Loan Bank stock, subsequent to the initiation of an additional Federal Home Loan Bank advance.

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Loans.Total loans at June 30, 2009 were $882,568,000 compared to $933,269,000 at December 31, 2008, a decrease of $50,701,000 or 5%. The decrease was primarily due to net charge-offs of $16,367,000, the transfer of loans in the amount of $9,885,000 to other real estate and loans paid off during the period. Major categories of loans included in the loan portfolio are as follows (in thousands):

	06/30/09			12/31/08			06/30/08
Consumer loans	$	30,270		$	31,864		$	33,206
Commercial, financial, & other		157,438			164,740			170,402
Land development loans — residential property		48,454			54,323			60,170
Land development loans — non residential property		13,405			16,094			21,000
Commercial real estate construction — residential property		13,125			17,296			20,605
Commercial real estate construction — non residential property		22,518			25,322			35,087
Commercial real estate mortgages		549,275			571,204			549,145
Residential real estate mortgages		48,083			52,426			54,466
		882,568			933,269			944,081
Allowance for loan losses		(22,422	)		(14,452	)		(16,638	)
	$	860,146		$	918,817		$	927,443

The following is a summary of non-performing assets and problems loans (in thousands):

	06/30/09		12/31/08		06/30/08
Troubled debt restructuring		46,714		17,765		13,145
Over 90 days past due and still accruing		—		450		7,319
Non-accrual loans		57,610		51,708		36,195
Total non-performing loans		104,324		69,923		56,659
Real estate owned		13,046		9,657		5,411
Real estate in redemption		4,388		—		—
Other repossessed assets		—		—		—
Other non-performing assets		17,434		9,657		5,411
Total non-performing assets	$	121,758	$	79,580	$	62,070

The increase in non-performing loans was largely due to the increase in loans that qualify as troubled debt restructuring, which amounted to $46,714,000 and $17,765,000 at June 30, 2009 and December 31, 2008, respectively. These loans qualified as troubled debt restructuring primarily due to the temporary change in payment type from principal and interest to interest only or the renewal of interest reserves when current loan to value ratios were outside of our loan policy. All loans categorized as troubled debt restructuring at June 30, 2009 are in compliance with their modified terms, with the exception of two loans amounting to $5,700,000 that are thirty days past due. The specific allowance of loans categorized as troubled debt restructuring was $0 and $375,000 at June 30, 2009 and December 31, 2008, respectively.

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The increase in non-performing loans and net charge-offs during 2009 has been most significant in the land development and commercial real estate construction segments of the Bank’s loan portfolio. These loans comprise 11% of loans and 55% of non accrual loans at June 30, 2009.

Management has implemented a strategy to decrease the amount of loans in these segments. These loans have decreased 14% during 2009, while the loan portfolio has declined by 6%.

Management has identified substandard loans over $500,000. These loans are individually discussed by management and strategies are developed and implemented to manage these loans most effectively.

Non-accrual loans at June 30, 2009 were $57,610,000, compared to $51,708,000 at December 31, 2008. The increase in non-accrual loans during the period was primarily due to the downgrading of 70 loans to non-accrual status for $28,337,000 and partially offset by net charge-offs of $16,367,000 and the transfer of 20 loans to other real estate for $9,885,000.

The distribution of non-accrual loans by loan type (in thousands) is as follows:

	Number of
	Loans		Balance
Consumer loans		16	$	1,039
Commercial, financial, & other		46		6,921
Land development loans — residential property		18		15,706
Land development loans — non residential property		2		4,772
Commercial real estate construction — residential property		11		5,077
Commercial real estate construction — non residential property		3		6,182
Commercial real estate mortgages		40		16,308
Residential real estate mortgages		13		1,605
Total non-accrual loans		149	$	57,610

Allowance for Loan Losses.The allowance for loan losses was $22,422,000 at June 30, 2009 compared to $14,452,000 at December 31, 2008, an increase of $7,970,000 or 55%. The increase was primarily due to net charge-offs of $16,367,000 and the continuing deterioration of the underlying collateral of the Bank’s non-performing loans. Regulatory requirements, documented in the in the discussion of Impaired Loans in the Glossary of the FFIEC Call Report Instructions dictate that any collateral deficiency on impaired loans that are collateral dependent must be immediately charged off. A collateral deficiency exists where the loan balance exceeds the value of the underlying collateral. As of June 30, 2009, the collateral deficiency of all collateral dependent impaired loans has been charged off.

Net charge-offs of $12,873,000 or 79% of year-to-date net-charge-offs were based on current valuations of the underlying collateral during these challenging economic conditions. These valuations are as of a certain date and there is a possibility that the valuation of this collateral will improve as economic conditions improve.

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A primary factor in the continued decline in the underlying value of our collateral and the decision to recognize these charge-offs was the accelerating decline in the first half of 2009 in the economic environment in Southeastern Michigan. This decline in economic conditions is heavily impacted by conditions and events that have recently impacted the automotive industry during the first half of 2009, including the recent bankruptcy of two major automotive manufacturers and resulting shut down of production and layoffs of employees. These events will have a negative impact on the residential real estate and commercial real estate markets in the Bank’s market area. These conditions have led to an increase in the Bank’s classified assets during 2009. Management has recognized this trend in our analysis of the allowance for loan losses at June 30, 2009. The allowance for loan losses was based upon management’s assessment of relevant factors, including loan growth, types and amounts of non-performing loans, historical and anticipated loss experience on such types of loans, and current economic conditions.

The following is an analysis of the allowance for loan losses (in thousands):

	Six Months						Six Months
	Ended			Year Ended			Ended
	06/30/09			12/31/08			06/30/08
Balance, beginning of year	$	14,452		$	10,617		$	10,617
Charge-offs:
Consumer loans		539			318			176
Commercial, financial & other		2,490			4,304			3,127
Land development loans — residential property		5,308			1,777			—
Land development loans — non residential property		2,356			—			—
Commercial real estate construction — residential property		1,176			1,635			58
Commercial real estate construction — non residential property		430			192			—
Commercial real estate mortgages		3,708			2,446			190
Residential real estate mortgages		621			296			106
Recoveries:
Consumer loans		11			19			11
Commercial, financial & other		189			117			31
Land development loans — residential property		28			33			—
Land development loans — non residential property		—			—			—
Commercial real estate construction — residential property		—			0			—
Commercial real estate construction — non residential property		—			3			—
Commercial real estate mortgages		26			21			4
Residential real estate mortgages		7			4			—
Net charge-offs		16,367			10,771			3,611
Provision for loan losses		24,337			14,606			9,632
Balance, end of period	$	22,422		$	14,452		$	16,638
Allowance to total loans		2.54	%		1.55	%		1.76	%

Premises and Equipment.Bank premises and equipment at June 30, 2009 were $20,784,000 compared to $21,272,000 at December 31, 2008, a decrease of $488,000 or 2%. The decrease is primarily due to depreciation during the period.

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Other Real Estate. Other real estate at June 30, 2009, 2009 was $17,434,000 compared to $9,657,000 at December 31, 2008, an increase of $7,777,000 or 81%. The distribution of other real estate by property type is listed below (in thousands):

	Number of
Property Type	Properties		Amount
Single Family Homes		36		$	4,598
Condominium		1			1,001
Vacant Land		9			4,562
Commercial		6			4,574
Office/Retail		5			2,699
Total		57		$	17,434

Other real estate is comprised of real estate owned of $13,046,000 and real estate in redemption status of $4,388,000. Eleven properties with a book value of $3,204,000 are currently generating rental income.

Other intangible assets.Other intangible assets were $4,195,000 at June 30, 2009 compared to $4,592,000 at December 31, 2008, a decrease of $397,000 or 9%. The Bank has intangible assets for the estimated value of core deposit accounts and borrower relationships acquired in the acquisitions of the Bank of Washtenaw and Fidelity. The intangible values represent the present value of the net revenue streams attributable to these intangibles. The gross carrying amount and accumulated amortization of these intangible assets at June 30, 2009 were as follows (in thousands):

	Gross
	Carrying		Accumulated
	Amount		Amortization
Core deposit intangible from acquisition of:
Bank of Washtenaw	$	264	$	22
Fidelity Financial Corporation of Michigan		2,493		208
Total core deposit intangible	$	2,757	$	230
Borrower relationship intangible from acquisition of :
Bank of Washtenaw	$	318	$	29
Fidelity Financial Corporation of Michigan		1,517		138
Total borrower relationship intangible	$	1,835	$	167
Total intangible assets	$	4,592	$	397

The core deposit intangible is being amortized over a period of eleven years and the borrower relationship intangible is being amortized over a period of ten years. At June 30, 2009, the core deposit intangible and borrower relationship intangible amounted to $2,527,000 and $1,668,000, respectively.

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Accrued Interest Receivable.Accrued interest receivable at June 30, 2009 was $3,512,000 compared to $3,499,000 at December 31, 2008, an increase of $13,000.

Other Assets. Other assets at June 30, 2009 were $31,360,000 compared to $21,483,000 at December 31, 2008, an increase of $9,877,000 or 46%. The increase was primarily due to changes in deferred tax assets.

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Deposits.Total deposits at June 30, 2009 were $813,167,000 compared to $938,395,000 at December 31, 2008, a decrease of $125,228,000 or 13%. The following is a summary of the distribution of deposits (in thousands):

	06/30/09		12/31/08		06/30/08
Non-interest bearing:
Demand	$	83,752	$	81,317	$	82,798
Interest bearing:
Checking	$	106,669	$	103,774	$	78,865
Money market		72,394		163,611		99,761
Savings		52,017		54,164		68,431
Time, under $100,000		221,980		211,109		187,628
Time, $100,000 and over		276,355		324,420		306,439
		729,415		857,078		741,124
Total deposits	$	813,167	$	938,395	$	823,922

The decrease in deposits was primarily due to the decrease in municipal and brokered time deposits during a period of decreasing interest rates and the accelerated liquidation of a wholesale money market deposit program by management. Management continues to implement a strategy to change the mix of the deposit portfolio by focusing more heavily on transaction accounts.

The Bank has enacted a strategy to utilize retail deposits as the primary funding for the Bank’s growth. Public funds and secured borrowings are also utilized as funding sources. The mix of these sources is determined by the Bank’s Asset and Liability Committee. The Bank has designated a public funds officer to coordinate and manage efforts to utilize public funds and brokered deposits. Public funds consist of interest checking and time deposits of local governmental units. They are the result of strong relationships between the Bank and the communities in the Bank’s marketing area and are considered by the Bank to be core deposits. The following is a summary of the distribution of municipal deposits (in thousands):

	06/30/09		12/31/08		06/30/08
Interest bearing checking	$	2,577	$	4,283	$	1,728
Time, $100,000 and over		15,326		38,999		96,339
Total municipal deposits	$	17,903	$	43,282	$	98,067

Brokered deposits are included in the Time, $100,000 and over category. Brokered deposits were $61,322,000, $97,997,000 and $31,932,000 at June 30, 2009, December 31, 2008 and June 30, 2008, respectively.

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Federal Funds Purchased. Federal funds purchased were $0 at June 30, 2009 and December 31, 2008.

Securities Sold Under Agreement to Repurchase. Securities sold under agreements to repurchase at June 30 2009 were $2,206,000 compared to $2,461,000 at December 31, 2008, a decrease of $255,000 or 10%. These repurchase agreements are secured by securities owned by the Bank.

Federal Home Loan Bank Advances. Federal Home Loan Bank advances were $73,955,000 at June 30, 2009 compared to $65,019,000 at December 31, 2008, an increase of $8,936,000 or 14%. The increase was due to the initiation of an additional FHLB advance during the period.

Accrued Interest Payable. Accrued interest payable at June 30, 2009 was $1,104,000 compared to $1,695,000 at December 31, 2008, a decrease of $591,000 or 35%. The decrease was primarily due to the decreasing volume and cost of deposits.

Other Liabilities. Other liabilities at June 30, 2009 were $1,491,000 compared to $1,037,000 at December 31, 2008, an increase of $454,000 or 44%. The increase was primarily due to the decrease in expenses payable during the period.

Subordinated Debentures. Subordinated debentures were $10,000,000 at June 30, 2009 and December 31, 2008.On December 19, 2002, the Corporation issued $10,000,000 of floating rate obligated mandatory redeemable securities through a special purpose entity as part of a pooled offering. The securities have a term of thirty years. The Corporation may redeem the securities after five years at face value. They are considered to be Tier 1 capital for regulatory capital purposes. Debt issue costs of $300,000 have been entirely amortized. During the third quarter of 2009, the Corporation will elect to defer regularly scheduled quarterly interest payments on the Corporation’s junior subordinated debentures. The terms of the debentures allow for the deferral of regularly scheduled quarterly interest payments for up to twenty consecutive quarters.

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Capital

Stockholders’ equity at June 30, 2009 was $87,877,000 compared to $103,311,000 as of December 31, 2008, a decrease of $15,434,000 or 15%. The decrease was due to the net loss recorded during the period.

The following is a presentation of the Corporation’s and Bank’s regulatory capital ratios (in thousands):

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

Based on the respective regulatory capital ratios, the Bank is considered to be adequately capitalized at June 30, 2009 and well capitalized at December 31, 2008. The decline in the Bank’s regulatory capital position has been caused primarily by the losses sustained by the Bank and the limitation in the deferred tax asset during 2008 and 2009.

Management will need to raise sufficient capital during 2009 to return the Bank to well-capitalized status. Management will need to consider various sources of capital and estimates the need to raise between $20 million and $50 million in capital during 2009.

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PART I — FINANCIAL INFORMATION

ITEM 3. — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity Analysis.The Corporation has sought to manage its exposure to changes in interest rates by matching the effective maturities or repricing characteristics of the Corporation’s interest-earning assets and interest-bearing liabilities. The matching of the assets and liabilities may be analyzed by examining the extent to which the assets and liabilities are interest rate sensitive and by monitoring the expected effects of interest rate changes on net interest income.

An asset or liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. If the Corporation’s assets mature or reprice more quickly or to a greater extent that its liabilities, the Corporation’s net portfolio value and net interest income would tend to increase during periods of rising interest rates but decrease during periods of falling interest rates. If the Corporation’s assets mature or reprice more slowly or to a lesser extent than its liabilities, its net portfolio value and net interest income would tend to decrease during periods of rising interest rates but increase during periods of falling interest rates.

The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution’s interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity “gap” is the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities, and is considered negative when the amount of interest rate sensitive liabilities exceed the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would be expected to adversely affect net interest income while a positive gap would be expected to result in an increase in net interest income, while conversely during a period of declining interest rates, a negative gap would be expected to result in an increase in net interest income and a positive gap would be expected to adversely affect net interest income.

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Different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, and thus changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category. Additionally, the gap analysis does not consider the many factors as banking interest rates move. While the interest rate sensitivity gap is a useful measurement and contributes toward effective asset and liability management, it is difficult to predict the effect of changing interest rates solely on that measure, without accounting for alterations in the maturity or repricing characteristics of the balance sheet that occur during changes in market interest rates.

During periods of rising interest rates, the Corporation’s assets tend to have prepayments that are slower than those in an interest rate sensitivity gap and would increase the negative gap position. Conversely, during a period of declining interest rates, the Corporation’s assets would tend to prepay faster than originally expected thus decreasing the negative gap position. In addition, some of the Corporation’s assets, such as adjustable rate mortgages, have caps on the amount by which their interest rates can change in any single period, and therefore may not reprice as quickly as liabilities in the same maturity category.

The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at June 30, 2009, which are expected to mature or reprice in each of the time periods shown below.

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

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Liquidity.Liquidity refers to readily available funds to meet the needs of borrowers and depositors. Levels of liquidity are closely monitored in conjunction with loan funding requirements and deposit outflows. Adequate liquidity protects institutions from raising funds under duress at excessive expense and provides a necessary cushion for occasional unpredictable aberrations in demand. While adequate liquidity is imperative, excessive liquidity in lower yielding cash investments or other easily marketable assets reduces potential interest income. Thus, an appropriate balance must be maintained to protect the institution and at the same time, prudently maximize income opportunities. Sources of liquidity from both assets and liabilities include federal funds sold, securities available for sale, loan repayments, core deposits, Federal Home Loan Bank advances and a federal funds purchase credit facility. Liquidity is continually measured and discussed. When liquidity and funding projections indicate that liquidity levels are not adequate to meet the current or projected liquidity needs of the Bank, management makes adjustments to improve its liquidity position.

The Corporation reduced its reliance on federal funds lines of credit as a primary source of funds during the second and third quarters of 2008. During the third quarter of 2008, the credit environment became very unstable and the ability to use unsecured federal funds lines of credit became very limited. As the Corporation had already reduced its reliance upon these lines of credit as a funding source, the Corporation was not significantly affected. However, this situation has affected management’s process of maintaining adequate levels of liquidity. As this source of overnight funding has decreased significantly, management has increased the amount of cash and cash equivalents in order to maintain an adequate level of liquidity. Management has also increased the amount of securities, available for sale and interest bearing deposits with banks that can be utilized as collateral against short-term borrowings. The increase in the amount of cash and cash equivalents and securities, available for sale is funded primarily with deposits and decreases in loans.

The Corporation is currently considering alternatives to supplement holding company liquidity, which has decreased primarily due to the Corporation’s repurchase of common stock. Two of the alternatives that have been considered are the deferral of interest payments on the Corporation’s subordinated debentures and the financing or sale/leaseback of two office buildings that are owned by the Corporation.

During the third quarter of 2009, the Corporation will elect to defer regularly scheduled quarterly interest payments on the Corporation’s junior subordinated debentures. The terms of the Debentures allow for the deferral of regularly scheduled quarterly interest payments for up to twenty consecutive quarters. The deferral of interest on the subordinated debentures will result in a corresponding annual deferral of distributions of on the trust preferred securities of approximately $500,000, based on current interest rates.

A decision on the financing or sale/leaseback of the two office buildings that are owned by the Corporation has not been reached at this time.

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The following tables provide information about the Bank’s contractual obligations and commitments at June 30, 2009 (in thousands):

Contractual Obligations

			Payments Due By Period
	Less Than		1-3		3-5		Over 5
	1 Year		Years		Years		Years		Total
Securities sold under agreements to repurchase	$	2,206	$	—	$	—	$	—	$	2,206
Certificates of deposit		469,053		28,199		774		309		498,335
Long-term borrowings		44,000		19,955		10,000		—		73,955
Lease commitments		677		728		12		—		1,417
Subordinated debentures		—		—		—		10,000		10,000
Totals	$	515,936	$	48,882	$	10,786	$	10,309	$	585,913

Unused Loan Commitments and Letters of Credit

	Amount Of Commitment Expiration Per Period
	Less Than		1-3		3-5		Over 5
	1 Year		Years		Years		Years		Total
Unused loan commitments	$	65,081	$	9,833	$	7,984	$	11,014	$	93,912
Standby letters of credit		994		432		2,000		—		3,426
Totals	$	66,075	$	10,265	$	9,984	$	11,014	$	97,338

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Item 4.Controls and Procedures

Disclosure Controls and Procedures — As of the end of the period covered by this report, the registrant carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures. Based on the review of the disclosure controls of the registrant, the Chief Executive Officer and the Chief Financial Officer have concluded that the registrant’s disclosure controls and procedures were effective as of June 30, 2009.

Internal Controls Over Financial Reporting — There has been no change in the registrant’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting.

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DEARBORN BANCORP, INC. AND SUBSIDIARY
FORM 10-Q (continued)

PART II — OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

The Corporation held its regular annual meeting of stockholders on May 19, 2009. The first matter for consideration was the re-election of directors. Three directors were re-elected to serve three year terms expiring in 2011. The voting results were as follows:

Nominee	Total For
David Himick		6,212,026
Michael J. Ross		6,413,584
Robert C. Schwyn		7,287,203

ITEM 6. EXHIBITS AND REPORTS IN FORM 8-K.

(a)	Exhibits
	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 April 21, 2009 was filed during the quarter ended June 30, 2009.

50

DEARBORN BANCORP, INC.
FORM 10-Q (continued)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dearborn Bancorp, Inc.
(Registrant)

/s/ John E. Demmer

John E. Demmer

Chairman

/s/ Michael J. Ross

Michael J. Ross

President and Chief Executive Officer

/s/ Jeffrey L. Karafa

Jeffrey L. Karafa

Treasurer and Chief Financial Officer

Date: August 14, 2009

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