Dearborn Bancorp 10K 2009 Annual report | DEAR Filing

Exhibit 13

and its subsidiary

2009
ANNUAL REPORT

Dearborn Bancorp, Inc.

and its subsidiary

Fidelity Bank

CONTENTS


Corporate Information			3
Chairman’s and President’s Letter to Stockholders			4
Summary of Selected Financial Data			6
Report of Independent Registered Public Accounting Firm			8
Management’s Report on Internal Control Over Financial Reporting			9
Consolidated Balance Sheets.			10
Consolidated Statements of Income			11
Consolidated Statements of Changes in Stockholders’ Equity			12
Consolidated Statements of Cash Flows			14
Notes to Consolidated Financial Statements			16
Management’s Discussion and Analysis			53
Dearborn Bancorp, Inc. Directors and Officers			79
Fidelity Bank Directors and Executive Officers			80
Fidelity Bank Officers			81
Fidelity Bank Subsidiaries			82
Investor Information			84

DESCRIPTION OF BUSINESS

Dearborn Bancorp, Inc.

Dearborn Bancorp, Inc. (the “Parent Company” and, together with its subsidiary, the “Corporation”) is a registered bank holding company which was incorporated on September 30, 1992. The primary purpose of the holding company is to own and operate the subsidiary bank, Fidelity Bank (the “Bank”). Dearborn Bancorp, Inc. trades on the Nasdaq Global Market under the symbol “DEAR”.

Fidelity Bank

The Bank was incorporated as Community Bank of Dearborn on June 28, 1993 and began operations as a state chartered commercial bank on February 28, 1994 from its main office located on Michigan Avenue in Dearborn. The Corporation acquired the Bank of Washtenaw on October 29, 2004. On January 4, 2007, the Corporation acquired Fidelity Financial Corporation of Michigan and its subsidiary, Fidelity Bank. On April 30, 2007, Community Bank of Dearborn was renamed Fidelity Bank.

The Bank offers a wide range of financial products and services. These include checking accounts, savings accounts, money market accounts, certificates of deposit, business checking, direct deposit, ATM services, telephone banking services, loan services (commercial, consumer, real estate mortgages), travelers’ checks, cashiers’ checks, wire transfers, safe deposit boxes, collection services, night depository service and internet banking services. The Bank does not have a trust department.

Internet banking can be utilized through the Bank’s website,www.fidbank.com. The Bank’s customers are able to execute transfers to their accounts and view their account information and transactions. Commercial customers have the option of utilizing the cash management module. This feature enables commercial customers to designate multiple users, initiate wire transfers, process ACH transactions, perform stop payments, and process federal tax payments. Over 1,000 users have signed up for online banking. The website also contains product information regarding the Bank’s loan and deposit products and the Corporation’s most recent financial information.

Community Bank Insurance Agency, Inc.

On August 19, 1997, the Bank formed Community Bank Insurance Agency, Inc. This company conducts limited insurance-related activities and holds a minority interest in MBT Title Services, LLC, a title insurance company.

Community Bank Mortgage, Inc.

On May 1, 2001, the Bank formed Community Bank Mortgage, Inc., a mortgage company that originates, sells and holds commercial and residential mortgage loans. On January 1, 2008, the operations of the mortgage company were merged into the Bank.

Community Bank Audit Services, Inc.

On March 13, 2002, the Bank formed Community Bank Audit Services, Inc., a company that offers internal auditing and compliance services to financial institutions.

To Our Stockholders,

The downturn in economic activity began to affect Fidelity Bank and Southeastern Michigan in 2007 and has only continued to worsen since then. Among other problems, including the once-unthinkable bankruptcies of General Motors and Chrysler, this decline has seriously depressed both residential and commercial real estate values in the area where we do business. Unlike many other metropolitan areas, we did not have a “real estate bubble” to burst here but values collapsed all the same. As a result, many of our real estate related loans have become problems as sales volumes and collateral values of properties have dramatically declined. Obviously, this situation has had an enormous impact upon our organization.

As a consequence of these developments, we recorded a net loss of ($61,175,000) or ($8.00) per fully diluted share during 2009, compared to a net loss of ($31,925,000) or ($3.99) per share during 2008. The factors that contributed most to this loss during 2009 were various costs related to Fidelity Bank’s problem loans, particularly the provision for loan losses, write downs and losses on the sale of other real estate, and defaulted loan expenses. Other factors of importance were the recording of a valuation allowance on our deferred tax asset, the impairment of intangible assets, and a significant increase in FDIC assessment expense.

The most significant factor in the decline in earnings during 2009 was the cost associated with Fidelity Bank’s non-performing assets. We recorded a provision for loan losses of $50,863,000 during 2009 compared to $14,606,000 during 2008. The amount provided for loan losses is based upon an analysis of activity in the allowance for loan losses. The large increase in the provision during 2009 was the result of a higher level of non-performing loans and net charge-offs. Net charge-offs amount to $30,190,000 in 2009 while they had been $10,771,000 during 2008. We also recorded write-downs and losses on the sale of other real estate of $2,905,000 during 2009 compared to $3,037,000 of such write-downs and losses in 2008. Defaulted loan expenses, primarily legal fees, taxes, insurance and maintenance of real estate to which we have taken title amounted to $4,624,000 in 2009 while they had been $2,078,000 during 2008.

During 2009, our local markets were significantly impacted by the unprecedented bankruptcy filings of two major automobile manufacturers during the second quarter of 2009. While the Corporation had no direct exposure to these entities, these bankruptcy filings, subsequent shutdown of production for several months and the resulting employee layoffs has had a devastating impact on the general economic conditions in Southeastern Michigan during 2009. This downturn in economic activity has continued to worsen the condition of the residential real estate market during 2009 as well as to significantly impact the Bank’s commercial and commercial real estate mortgage portfolios. This downturn has also led to a significant decline in collateral values of all types of real property.

The second most significant component of the 2009 loss was the recording of a $25,851,000 valuation allowance against the deferred tax asset that we had carried on our financial statements. The practical effect of this non-cash charge was to completely eliminate the deferred tax asset. The valuation allowance has the potential to keep us from paying income taxes on approximately $75 million in future earnings. On a good note, we were able to recognize an income tax refund of $5,452,000 in the Fourth Quarter when new legislation extended our Net Operating Loss carry back period for federal income taxes from two to five years for 2008 and 2009 losses.

We also recognized another non-cash charge of $3,997,000 for the impairment of other intangible assets that were created from prior bank acquisitions. This final impairment completely removes these intangible assets from our financial statements. The goodwill created from the prior acquisitions was completely written-off in 2008.

We also recorded a major increase in FDIC assessment expense during 2009. FDIC expenses amounted to $2,843,000 last year while they had been just $696,000 in the previous year. This increase was primarily due to an increase in the assessment rates charged during the year along with a special assessment on all banks. Stress on the FDIC’s reserves due to resolution of bank failures is unlikely to ease any time soon.

Total assets at December 31, 2009, decreased to $986,486,000 while they had been $1,121,918,000 one year earlier in an effort to preserve capital levels. As a result of the net loss recorded in 2009, stockholders’ equity declined to $41,945,000 at year end. Consequently, Fidelity Bank’s capitalization status went from well capitalized to under capitalized and resulted in the negotiation of a Consent Order with the Federal Deposit Insurance Corporation and the Office of Financial and Insurance Regulation for the State of Michigan.

In view of the economic environment and our organization’s condition, we are moving forward very cautiously. It is clear that we must improve Fidelity Bank’s Tier One capital and restore its capitalization status to well-capitalized as soon as possible. The two primary means of doing this are to issue new common stock or to shrink the bank’s asset size.

In the meantime, we are striving to deal with our non-performing assets and sell our portfolio of other real estate. For now, we have curtailed new lending in order to concentrate our efforts on these two critical tasks. In addition, we are carefully controlling expenses and overhead. As we continue to develop and implement specific plans to deal with the challenges we face, we can make no promises other than our focused efforts to make things better. The Annual Meeting of Stockholders will be held on May 18, 2010, at the Park Place, 23400 Park Avenue, Dearborn, Michigan, at 3:00 p.m. We hope that you will attend.

Sincerely,

John E. Demmer
Chairman of the Board

Michael J. Ross
President and
Chief Executive Officer

SUMMARY OF SELECTED FINANCIAL DATA

The following selected consolidated financial and other data as of and for each of the five years in the period ended December 31, 2009 should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Consolidated Balance Sheets as of December 31, 2009 and 2008, and the Consolidated Statements of Income for the years ended December 31, 2009 and 2008 are included elsewhere in this Annual Report.


(In thousands, except share and per share data)	2009			2008			2007			2006			2005


OPERATIONS
Interest income	$	54,253		$	61,126		$	70,110		$	53,886		$	43,855
Interest expense		23,367			28,995			36,491			25,884			16,403

Net interest income		30,886			32,131			33,619			28,002			27,452
Provision for loan losses		50,863			14,606			5,821			943			1,081

Net interest income after provision for loan losses		(19,977	)		17,525			27,798			27,059			26,371
Total non-interest income		(469	)		(930	)		1,020			925			505
Total non-interest expense		32,720			65,007			23,796			16,225			15,499

Net income (loss) before federal income tax expense		(53,166	)		(48,412	)		5,022			11,759			11,377
Income tax expense (benefit)		8,009			(16,487	)		1,856			3,940			3,867

Net income (loss)		($61,175	)		($31,925	)	$	3,166		$	7,819		$	7,510


FINANCIAL CONDITION
Total assets	$	986,486		$	1,121,918		$	1,046,981		$	855,931		$	706,497
Mortgage loans held for sale		1,129			1,834			1,316			1,823			1,041
Securities, available for sale		45,964			84,148			8,902			5,878			17,153
Securities, held to maturity		336			0			0			0			0
Federal Home Loan Bank stock		3,698			3,614			2,072			1,288			1,293
Loans		833,136			933,269			952,084			756,420			657,037
Allowance for loan losses		(35,125	)		(14,452	)		(10,617	)		(7,775	)		(6,808	)
Other assets		137,348			113,505			93,224			98,297			36,781
Deposits		867,955			938,395			822,627			633,216			582,438
Federal Home Loan Bank advances		63,855			65,019			41,370			25,561			25,588
Subordinated debentures		10,000			10,000			10,000			10,000			10,000
Other borrowings		—			2,461			30,580			37,919			1,615
Other liabilities		2,731			2,732			4,856			4,250			2,643
Stockholders’ equity		41,945			103,311			137,548			144,985			84,213

PER SHARE INFORMATION (1)
Net income (loss) per common share — basic		($8.00	)		($3.99	)	$	0.37		$	1.23		$	1.27
Net income (loss) per common share — diluted		($8.00	)		($3.99	)	$	0.36		$	1.17		$	1.20
Book value per common share	$	5.46		$	13.42		$	16.70		$	16.15		$	14.11
Average shares outstanding — basic		7,645,076			8,007,345			8,602,704			6,372,471			5,899,281
Average shares outstanding — diluted		7,645,076			8,007,345			8,827,531			6,672,319			6,274,404
Shares outstanding at end of period		7,687,470			7,696,204			8,237,413			8,975,085			5,967,190

OTHER DATA
Return on average assets		-5.79	%		-3.02	%		0.30	%		1.02	%		1.08	%
Return on average equity		-71.83	%		-23.51	%		2.21	%		8.20	%		9.44	%
Net interest margin		3.07	%		3.29	%		3.48	%		3.80	%		4.14	%
Net interest spread		2.77	%		2.79	%		2.74	%		3.06	%		3.62	%
Allowance for loan losses to total loans		4.22	%		1.55	%		1.12	%		1.03	%		1.04	%
Nonperforming assets to total assets		13.40	%		5.51	%		2.42	%		0.90	%		0.26	%
Stockholders’ equity to total assets		4.25	%		9.21	%		13.14	%		16.94	%		11.92	%
Total interest expense to gross interest income		43.07	%		47.43	%		52.05	%		48.03	%		37.40	%
Number of Offices		17			18			19			12			12


(1)		All share and per share amounts have been adjusted to reflect the issuance of stock dividends.

COMMITMENT TO COMMUNITY

Commitment to community is one of the primary principles upon which Dearborn Bancorp, Inc. and its primary subsidiary, Fidelity Bank were founded. Since Fidelity Bank opened for business in 1994, management has emphasized the importance of community involvement and community development as part of the Bank’s mission. In fact, the majority of the Bank’s directors, officers and employees live in the communities that are serviced by the Bank. During 2009, the Bank provided the following local organizations with financial support or personal involvement:

American Arab Chamber of Commerce
Ann Arbor Board of Realtors
Ann Arbor Chamber of Commerce
Auburn Hills Chamber of Commerce
Birmingham Area Seniors (BASCC)
Birmingham Bloomfield Chamber of Commerce
Birmingham Lions Club
Birmingham Optimist Club
Boy Scouts of America
Canton Chamber of Commerce
Canton Community Foundation
Canton Exchange Club
Canton Senior Center
Canton Senior Safety Coalition
Central Macomb Chamber of Commerce
Clinton Township Community Blood Drive
Clinton Township Senior Expo
Dearborn Baseball
Dearborn Board of Realtors
Dearborn Chamber of Commerce
Dearborn Exchange Club
Dearborn Goodfellows
Dearborn Heights Chamber of Commerce
Dearborn Heights Lion’s Club
Dearborn Heights Parks and Recreation
Dearborn Heights Spirit Festival
Dearborn Kiwanis
Dearborn Optimist Club
Dearborn Police Officers Charity
Dearborn Rotary Club
Dearborn Senior Center
Dearborn Symphony Orchestra
Divine Child School
Easter Seals of Michigan
Garden Club of Dearborn
Goodwill Industries of Greater Detroit
Habitat for Humanity
Henry Ford Community College Foundation
Kiwanis Club of Dearborn
Macomb County Treasurer’s Association
Mike Adray Memorial Foundation
NAACP (Detroit Branch)
Northville Chamber of Commerce
Oakwood Health Care Foundation
Plymouth Chamber of Commerce
Rochester Chamber of Commerce
Saline 4-H Farmers
Saline Area Chamber of Commerce
Showcase Plymouth
Southern Wayne County Chamber of Commerce
Southfield Area Chamber of Commerce
Southgate Senior Center
Washtenaw County 4-H Fair
Washtenaw Housing Alliance
Wayne County Treasurers Association
West Washtenaw Business Association
Western Wayne Association of Realtors
YWCA of Western Wayne County

Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated balance sheets of Dearborn Bancorp, Inc. (Corporation) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2009. The Corporation’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audit included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dearborn Bancorp, Inc. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming the Corporation will continue as a going concern. As further discussed in Note B, the Corporation has suffered recurring losses resulting from the effects of the economic downturn in their operating region causing its subsidiary bank to be undercapitalized and resulting in a consent order to be issued by its primary regulator. These facts raise substantial doubt about the Corporation’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/BKD,LLP

Indianapolis, Indiana
March 31, 2010

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining an effective system of internal control over financial reporting presented in conformity with generally accepted accounting principles. There are inherent limitations in the effectiveness of any system of internal control. Accordingly, even an effective system of internal control can provide only reasonable assurance with respect to financial statement preparation.

Management assessed the Corporation’s systems of internal control over financial reporting presented in conformity with generally accepted accounting principles as of December 31, 2009. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2009, Dearborn Bancorp, Inc. maintained effective control over financial reporting presented in conformity with generally accepted accounting principles based on those criteria.

The Corporation’s registered public accounting firm has issued an attestation report on our internal control over financial reporting.

Dearborn Bancorp, Inc. and Subsidiary



/s/ Michael J. Ross
Michael J. Ross
President and Chief Executive Officer



/s/ Jeffrey L. Karafa
Jeffery L. Karafa
Vice President, Treasurer and Secretary

DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS


	December 31,
(Dollars, in thousands)	2009			2008
ASSETS
Cash and cash equivalents
Cash and due from banks	$	7,803		$	11,671
Federal funds sold		156			4,455
Interest bearing deposits with banks		69,538			36,876

Total cash and cash equivalents		77,497			53,002

Mortgage loans held for sale		1,129			1,834
Securities available for sale		45,964			84,148
Securities held to maturity		336			—
Federal Home Loan Bank stock		3,698			3,614
Loans
Loans		833,136			933,269
Allowance for loan losses		(35,125	)		(14,452	)

Net loans		798,011			918,817

Premises and equipment, net		20,194			21,272
Real estate owned		23,435			9,657
Other intangible assets		—			4,592
Accrued interest receivable		3,562			3,499
Other assets		12,660			21,483


Total assets	$	986,486		$	1,121,918


LIABILITIES
Deposits
Non-interest bearing deposits	$	83,873		$	81,317
Interest bearing deposits		784,082			857,078

Total deposits		867,955			938,395

Other liabilities
Securities sold under agreements to repurchase		—			2,461
Federal Home Loan Bank advances		63,855			65,019
Accrued interest payable		1,046			1,695
Other liabilities		1,685			1,037
Subordinated debentures		10,000			10,000

Total liabilities		944,541			1,018,607

STOCKHOLDERS’ EQUITY
Common stock — no par value 20,000,000 shares authorized, 7,687,470 and 7,696,204 shares outstanding in 2009 and 2008, respectively		131,929			131,784
Retained earnings		(89,850	)		(28,675	)
Accumulated other comprehensive income (loss)		(134	)		202

Total stockholders’ equity		41,945			103,311


Total liabilities and stockholders’ equity	$	986,486		$	1,121,918

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

DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS


	Years Ended December 31,
(In thousands, except share data)	2009			2008
Interest income
Interest on loans	$	53,273		$	60,533
Interest on securities, available for sale		589			464
Interest on deposits with banks		374			86
Interest on federal funds		17			43

Total interest income		54,253			61,126

Interest expense
Interest on deposits		20,993			25,106
Interest on other liabilities		2,374			3,889

Total interest expense		23,367			28,995

Net interest income		30,886			32,131
Provision for loan losses		50,863			14,606


Net interest income (loss) after provision for loan losses		(19,977	)		17,525


Non-interest income
Service charges on deposit accounts		1,499			1,538
Fees for other services to customers		126			128
Gain on the sale of loans		352			165
Gain (loss) on the sale of securities		490			17
Other than temporary impairment on securities, held to maturity Portion of loss recognized in other comprehensive loss before taxes		414			—

Net impairment losses recognized in earnings		(414	)		—
Gain (loss) on the sale of real estate owned		(139	)		(745	)
Loss on the write-down of real estate owned		(2,766	)		(2,292	)
Other income		383			259

Total non-interest income		(469	)		(930	)

Non-interest expense
Salaries and employee benefits		12,974			13,142
Occupancy and equipment expense		3,623			3,752
Amortization of intangible expense		595			968
Impairment of goodwill		—			34,028
Impairment of other intangible assets		3,997			5,573
FDIC assessment		2,843			696
Advertising and marketing		237			550
Stationery and supplies		429			592
Professional services		807			1,063
Data processing		905			848
Defaulted loan expense		4,624			2,078
Other operating expenses		1,686			1,717

Total non-interest expense		32,720			65,007


Income before federal income tax expense		(53,166	)		(48,412	)
Income tax expense (benefit)		8,009			(16,487	)


Net loss		($61,175	)		($31,925	)


Per share data:
Net loss — basic		(8.00	)		(3.99	)
Net loss — diluted		(8.00	)		(3.99	)

Weighted average number of shares outstanding — basic		7,645,076			8,007,345
Weighted average number of shares outstanding — diluted		7,645,076			8,007,345

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

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)

Years Ended December 31, 2009 and 2008


							Accumulated
							Other			Total
	Common			Retained			Comprehensive			Stockholders’
	Stock			Earnings			Income (loss)			Equity

Balance, January 1, 2008	$	134,278		$	3,250		$	20		$	137,548

Purchase of common stock (575,500 shares)		(2,627	)		—			—			(2,627	)

Stock awards earned (43,883 shares granted, 9,592 shares forfeited)		71			—			—			71

Stock option expense		62			—			—			62

Net loss		—			(31,925	)		—			(31,925	)

Other comprehensive income (loss)
Changes in net unrealized gain on securities available for sale								293			293
Reclassification adjustment for gain included in net income		—			—			(17	)		(17	)

Net change in net unrealized gain on securities available for sale		—			—			276			276
Deferred tax effects								(94	)		(94	)

Other comprehensive income		—			—			182			182

Total comprehensive income											(31,743	)


Balance, December 31, 2008	$	131,784			($28,675	)	$	202		$	103,311

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

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)

Years Ended December 31, 2009 and 2008


						Accumulated
						Other			Total
	Common		Retained			Comprehensive			Stockholders’
	Stock		Earnings			Income (loss)			Equity

Balance, December 31, 2008	$	131,784		($28,675	)	$	202		$	103,311

Stock awards earned		76		—			—			76

Stock option expense		69		—			—			69

Net loss		—		(61,175	)		—			(61,175	)

Other comprehensive income (loss)
Changes in net unrealized loss on securities available for sale							(21	)		(21	)
Reclassification adjustment for gain included in net income		—		—			(490	)		(490	)

Net change in net unrealized loss on securities available for sale		—		—			(511	)		(511	)
Deferred tax effects							175			175

Other comprehensive loss		—		—			(336	)		(336	)

Total comprehensive income										(61,511	)


Balance, December 31, 2009	$	131,929		($89,850	)		($134	)	$	41,945

DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
(In thousands)	2009			2008
Cash flows from operating activities
Interest and fees received	$	54,190		$	61,443
Interest paid		(24,016	)		(30,468	)
Proceeds from sale of mortgages held for sale		34,291			19,817
Origination of mortgages held for sale		(33,234	)		(20,041	)
Taxes refunded		700			1,118
Loss on sale of real estate owned		(139	)		(840	)
Gain on sale of securities		490			17
Cash paid to suppliers and employees		(23,286	)		(21,706	)

Net cash provided by operating activities		8,996			9,340

Cash flows from investing activities
Sale of securities available for sale		54,208			7,276
Proceeds from calls, maturities and repayments of of securities available for sale		53,078			11,826
Purchases of securities available for sale		(70,641	)		(93,935	)
Purchase of Federal Home Loan Bank stock		(84	)		(1,542	)
(Increase) decrease in loans, net of payments received		48,381			(3,748	)
Proceeds from the sale of real estate owned		4,879			6,162
Purchases of property and equipment		(257	)		(530	)

Net cash provided by (used in) investing activities		89,564			(74,491	)

Cash flows from financing activities
Net decrease in non-interest bearing deposits		2,556			(2,277	)
Net increase in interest bearing deposits		(72,996	)		118,045
Increase (decrease) in repurchase agreements		(2,461	)		1,981
Net increase in federal funds purchased		0			(30,100	)
Proceeds from Federal Home Loan Bank advances		48,000			36,500
Repayments on Federal Home Loan Bank advances		(49164	)		(12,851	)
Purchase of common stock		—			(2,627	)

Net cash provided by (used in) financing activities		(74,065	)		108,671

Increase (decrease) in cash and cash equivalents		24,495			43,520
Cash and cash equivalents at the beginning of year		53,002			9,482


Cash and cash equivalents at the end of year	$	77,497		$	53,002

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

DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)


	Years Ended December 31,
(In thousands)	2009			2008

Reconciliation of net income to net cash provided by operating activities
Net income		($61,175	)		($31,925	)
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		50,863			14,606
Depreciation and amortization expense		1,335			1,356
(Increase) decrease in deferred tax asset		16,794			(14,117	)
Restricted stock award expense		69			62
Stock option expense		76			71
Accretion of discount on investment securities		(52	)		(162	)
Amortization of premium on investment securities		331			25
Write-down of real estate owned		2,766			2,292
Amortization of intangible assets		595			968
Impairment of goodwill		0			34,028
Impairment of other intangible assets		3,997			5,573
Impairment of securities, held to maturity		414			0
(Increase) decrease in mortgages held for sale		705			(518	)
Increase in interest receivable		(63	)		317
Increase (decrease) in interest payable		(649	)		(1,473	)
(Increase) decrease in other assets		(7,658	)		(1,112	)
Increase (decrease) in other liabilities		648			(651	)


Net cash provided by operating activities	$	8,996		$	9,340


Supplemental noncash disclosures:
Transfers from loans to real estate owned	$	21,547		$	11,792

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

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows.

Nature of Operations and Principals of Consolidation

Dearborn Bancorp, Inc. (the “Corporation”) was incorporated in Michigan on September 30, 1992. The Corporation’s primary subsidiary, Community Bank of Dearborn (the “Bank”), began operations on February 28, 1994. As discussed in Note B, the Corporation acquired Fidelity Financial Corporation of Michigan on January 4, 2007 and merged its operations into the Bank. On April 30, 2007, the Community Bank of Dearborn was renamed Fidelity Bank. The Bank operates seventeen banking offices in Dearborn (2), Dearborn Heights, Plymouth Township, Canton Township, Clinton Township (2), Southgate, Auburn Hills, Saline, Ann Arbor, Birmingham, Bloomfield Township, Bingham Farms, Southfield (2) and Shelby Township in Michigan, offering a full range of banking services to individuals and businesses. The Bank also operates Community Bank Insurance Agency, Inc., an insurance agency with limited activities and Community Bank Audit Services, Inc., a company that offers internal auditing services to financial institutions.

The Bank’s primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are commercial, residential mortgage, and consumer loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets and real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Real estate loans are secured by both residential and commercial real estate. Other financial instruments which potentially represent concentrations of credit risk include deposit accounts in other financial institutions.

While the Corporation’s management monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Corporation-wide basis. Accordingly, all of the Corporation’s banking operations are considered by management to be aggregated in one reportable operating segment.

The consolidated financial statements include the accounts of Dearborn Bancorp, Inc. and its wholly-owned subsidiary, Fidelity Bank and its wholly-owned subsidiaries, Community Bank Insurance Agency, Inc. and Community Bank Audit Services, Inc. All significant intercompany transactions are eliminated in consolidation.

Use of Estimates

In the preparation of financial statements, management is required to make estimates and assumptions that affect reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are more susceptible to change in the near term include the allowance for loan losses, fair value of real estate owned, fair value of certain financial instruments, and the carrying value of intangible assets.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cash and Cash Equivalents

The Corporation considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2009 and 2008, cash equivalents consisted primarily of interest-bearing deposits with banks and federal funds sold.

One or more of the financial institutions holding the Corporations’s cash accounts are participating in the FDIC’s Transaction Account Guarantee Program. Under the program, through June 30, 2010, all noninterest-bearing transaction accounts at these institutions are fully guaranteed by the FDIC for the entire amount in the account.

For financial institutions opting out of the FDIC’s Transaction Account Guarantee Program or interest-bearing cash accounts, the FDIC’s insurance limits increased to $250,000, effective October 3, 2008. The increase in federally insured limits is currently set to expire December 31, 2013. At December 31, 2009, the Corporation’s cash accounts exceeded federally insured limits by approximately $68,388,000 of which approximately $68,138,000 was held with the Federal Reserve Bank of Chicago and the Federal Home Loan Bank of Indianapolis.

Restrictions on Cash

The Corporation was required to have $91,000 and $1,917,000 of cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements at year end 2009 and 2008, respectively. These balances do not earn interest. Additionally, the Corporation pledged securities with a collateral value of $15,337,000 to the Federal Reserve Bank.

Securities

Effective April 1, 2009, the Corporation adopted new accounting guidance related to recognition and presentation of other-than-temporary impairment (ASC 320-10). When the Corporation does not intend to sell a debt security, and it is more likely than not, the Corporation will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

As a result of this guidance, the Corporation’s consolidated statement of operations as of December 31, 2009, reflects the full impairment (that is, the difference between the security’s amortized cost basis and fair value) on debt securities that the Corporation intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis. For available-for-sale and held-to-maturity debt securities that management has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the noncredit loss is recognized in accumulated other comprehensive income (loss). The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Prior to the adoption of the recent accounting guidance on April 1, 2009, management considered, in determining whether other-than-temporary impairment exists, (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs and an allowance for loan losses.

Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income on mortgage and commercial loans is generally discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Consumer loans are typically charged off no later than 180 days past due. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan.

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance when management believes the uncollectability of the loan balance is confirmed or when required by policy.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.

A loan is impaired when full payment under the loan terms is not expected. Loan relationships over $500,000 that are rated substandard and are on non-accrual status are individually evaluated for impairment. If this evaluation indicated that there is a collateral shortfall and the loan is collateral dependent, the shortfall is charged off. If a loan that is not collateral dependent is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the fair value of estimated future cash flows using the loan’s existing rate.

Foreclosed Assets Held for Sale

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net income or expense from foreclosed assets.

Premises and Equipment

Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:

Buildings and improvements — 10 to 39 years
Furniture and equipment — 3 to 10 years

Long-Term Assets

Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Federal Home Loan Bank (FHLB) Stock

The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. The Corporation reviewed the FHLB Stock and based on the current performance of the Federal Home Loan Bank of Indianapolis, the Corporation determined there was no impairment of this stock at December 31, 2009.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Goodwill and Other Intangible Assets

Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified.

Other intangible assets consist of core deposit and business relationship intangible assets arising from bank acquisitions in 2004 and 2007. They are initially measured at fair value and are being amortized on an accelerated method over their estimated useful lives, which range from 10 to 11 years.

In addition to a quarterly review by management, goodwill and other intangible assets are evaluated annually by an outside consultant for impairment. If there is impairment, a non-cash impairment expense is recorded.

Stock Compensation

At December 31, 2009 and 2008, the Corporation has a share-based compensation plan, which is more fully described in Note P.

Loan Commitments and Related Financial Instruments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Stock Dividends

The fair value of shares issued in stock dividends is transferred from retained earnings to common stock. All share and per share amounts are retroactively adjusted for stock dividends.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes

The Corporation files a consolidated federal income tax return. Income tax expense is the total of federal income tax due or refundable and the change in deferred tax assets and liabilities. The Corporation uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. A valuation allowance, if needed, reduces deferred tax amounts to the amount expected to be realized.

The Corporation adopted ASC 740, “Accounting for Income Taxes”, formerly known as FASB Interpretation 48,Accounting for Uncertainty in Income Taxes(“FIN 48”), as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no affect on the Corporation’s financial statements.

The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense.

Reclassifications

Some items in the prior year financial statements were reclassified to conform to the current presentation. These reclassifications had no impact on net income.

Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

Earnings (Loss) Per Share

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

Comprehensive Income (loss)

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income includes unrealized gains and losses on securities available for sale, net of deferred income tax, which are also recognized as separate components of equity.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Dividend Restrictions

Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Corporation or by the Corporation to stockholders.

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Valuation Measurements

Valuation methodologies often involve a significant degree of judgment, particularly when there are no observable active markets for the items being valued. Investment securities and residential mortgage loans held for sale are carried at fair value, as defined in ASC 820, “Fair Value Measurements and Disclosures”, formerly SFAS No. 157 “Fair Value Measurement”, which requires key judgments affecting how fair value for such assets and liabilities is determined. In addition, the outcomes of valuations have a direct bearing on the carrying amounts for goodwill, and intangibles assets. To determine the values of these assets and liabilities, as well as the extent to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment rates and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect the Corporation’s results of operations.

Adoption of New Accounting Standards

In July 2009, the FASB issued ASU No. 2010-06,Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:

A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and

In the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements.

In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures:

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and

A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.

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

ASU 2009-01 (formerly SFAS No. 168), Topic 105 —Generally Accepted Accounting Principles - FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles

ASU 2009-01 establishes the FASB Accounting Standards Codification (Codification) as the single source of authoritative U.S. generally accepted accounting principles (U.S. GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. ASU 2009-01 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We have made the appropriate changes to GAAP references in our financial statements.

Earnings Per Share (EPS): (formerly FSP EITF 03-6-1),Determining Whether Instruments Granted in Shared-Based Payment Transaction are Participating Securities.

In June 2008, the FASB issued ASC 260 which clarifies that unvested share-based payment awards with a right to receive nonforfeitable dividends are participating securities. ASC 260 also provides guidance on how to allocate earnings to participating securities and compute EPS using the two-class method. ASC 260 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The provisions of ASC 260 did not have a material impact on our EPS calculation.

ASU No. 2009-05,Measuring Liabilities at Fair Valuecodified in “Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value”

In August 2009, this ASU provides amendments for fair value measurements of liabilities. It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques. ASU 2009-05 also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance or fourth quarter 2009. The provisions of ASU 2009-05 did not have a material impact on our financial condition, results of operations or disclosures.

ASU 2009-01 (formerly SFAS No. 168), Topic 105 —Generally Accepted Accounting Principles — FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounting Standards Codification (ASC) 810 (formerly FASB Statement No. 167,Amendments to FASB Interpretation No. 46(R)

In June 2009, the FASB issued this guidance which amends the consolidation guidance applicable to variable interest entities. The amendments to the consolidation guidance affect all entities currently within the scope of ASC Topic 810-10 (formerly FIN 46(R)), as well as qualifying special-purpose entities (QSPEs) that are currently excluded from the scope of that guidance. This guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009. The provisions of ASC Topic 810-10 did not have a material impact on our financial condition, results of operations or disclosures.

NOTE B — CONSENT ORDER AND GOING CONCERN CONSIDERATIONS

Consent Order

Due to our financial condition, the Federal Deposit Insurance Corporation (“FDIC”) and the Office of Financial and Insurance Regulation for the State of Michigan (“OFIR”) required that our Board of Directors sign a formal enforcement action (“Consent Order”) with the FDIC and OFIR which conveys specific actions needed to address certain findings from their examination and to address our current financial condition. We entered into the Consent Order on February 12, 2010, which contains a list of requirements that are to be met by specific dates. Certain requirements are listed below:

	•		Completion of a senior management study by an independent consultant

	•		Plans for the reduction of delinquencies and classified assets

	•		Plans for lending and collection policies

	•		Plans for the reduction of loan concentrations

	•		The revision and implementation of a comprehensive strategic plan

	•		The revision of its Liquidity Plan and the submission of weekly liquidity reports to the FDIC and OFIR

The Consent Order also includes a capital directive, which requires the Bank to have and maintain its level of tier 1 capital as a percentage of total assets (capital ratio) at a minimum of 9% and its level of qualifying total capital as a percentage of risk-weighted assets (total risk-based capital ratio) at a minimum of 12% . These ratios are in excess of the statutory minimums to be well-capitalized. At December 31, 2009, the Bank’s capital ratio was 5.10% and the Bank’s total risk-based capital ratio was 7.19%.

Additionally, the Bank is prohibited from declaring or paying any cash dividends without prior written consent of the FDIC.

The Bank submitted a Capital Restoration Plan (“CRP”) to the FDIC and OFIR on December 15, 2009, due to our undercapitalized status based on our September 30, 2009 regulatory report of condition and income. The CRP addresses, among other things, the steps management will take to cause our capital levels to return to the minimum level to be adequately capitalized.

The Bank is currently undercapitalized. Failure to meet the minimum ratios set forth in the Consent Order could result in regulators taking additional enforcement action against us.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE B — CONSENT ORDER AND GOING CONCERN CONSIDERATIONS (Con’t)

Going Concern

As a result of the effects of the economic downturn and the bankruptcy and downsizing of two major automotive manufacturers headquartered in our region, the capital of the Corporation and the Bank has been significantly depleted. Management is currently attempting to raise additional capital that will return the Bank to compliance with regulatory capital requirements of the Consent Order. Our ability to raise capital is contingent on the current capital markets and our financial performance. Available capital markets are not currently favorable and we cannot be certain of our ability to raise capital on any terms.

The losses reported by the Corporation during 2008 and 2009 were primarily due to large provisions for loan losses, the impairment of goodwill and other intangible assets and the establishment of a valuation allowance against the Corporation’s deferred tax asset. Prior to sustaining these losses in 2008 and 2009, the Corporation had a history of profitable operations. Our return to profitable operations is contingent on the economic recovery in our region and the stability of collateral values of the real estate that secures many of our loans. It is difficult to predict when the economy will begin to recover and the impact of that recovery on our operations. Therefore, we cannot predict the timing of our return to profitable operations.

While the Corporation believes that it may be able to raise sufficient capital to meet its capital requirements and manage loan losses in the near term until such time that the local economy improves without having to liquidate assets, the realization of assets in other than the normal course of business in order to provide liquidity could result in losses not reflected in these financial statements.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE C — SECURITIES

The amortized cost and fair value for securities available for sale and the unrealized gains and losses recognized as accumulated other comprehensive income were as follows (in thousands):


	December 31, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

US Government sponsored entity securities	$	12,759	$	20		($30	)	$	12,749
Corporate bonds		33,308		—		(197	)		33,111
Mortgage backed securities		101		3		—			104


Totals	$	46,168	$	23		($227	)	$	45,964


	December 31, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

US Government sponsored entity 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 December 31, 2009 by contractual maturity are shown below (in thousands). Securities not due at a single maturity date, such as mortgage backed securities are shown separately.


	Amortized		Fair
	Cost		Value

Due in one year through five years	$	46,067	$	45,860
Mortgage backed securities		101		104


Totals	$	46,168	$	45,964

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE C — SECURITIES (Continued)

Sales of available for sale securities for the years ended December 31, are as follows (in thousands):


	2009		2008

Proceeds	$	54,208	$	7,276
Gross gains		492		17
Gross losses		2		—

Securities having a carrying value of $15,441,000 and $5,524,000 at December 31, 2009 and 2008, respectively, were pledged to secure Federal Home Loan Bank of Indianapolis advances, time deposits, securities sold under agreements to repurchase and clearing activity with the Federal Reserve Bank.

Securities with unrealized losses at year-end 2009 and 2008, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:


	December 31, 2009
	Less than one year					One year or more				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
Investment category	Value		Loss			Value		Loss		Value		Loss

US Government sponsored entity securities	$	6,657		($30	)	$	—	$	—	$	6,657		($30	)
Corporate bonds		33,111		(197	)		—		—		33,111		(197	)


Total temporarily impaired	$	39,768		($227	)	$	—	$	—	$	39,768		($227	)


	December 31, 2008
	Less than one year					One year or more				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
Investment category	Value		Loss			Value		Loss		Value		Loss

US Government sponsored entity securities	$	5,997		($2	)	$	—	$	—	$	5,997		($2	)
Corporate bonds		2,041		(4	)		—		—		2,041		(4	)


Total temporarily impaired	$	8,038		($6	)	$	—	$	—	$	8,038		($6	)

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE C — SECURITIES (Continued)

The unrealized losses on the Corporation’s investments were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Corporation does not intend to sell the investments and it is not more likely than not the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at December 31, 2009.

The Corporation holds two single issuer trust preferred securities that are classified as securities held to maturity. The amortized cost and fair value of securities, held to maturity are listed below (in thousands):


	December 31, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Trust preferred securities	$	336	$	—	$	—	$	336


Totals	$	336	$	—	$	—	$	336

The contractual maturity of these securities is over five years.

The single issuer trust preferred securities were evaluated for other than temporary impairment by determining the strength of the underlying issuer and its ability to make the contractual principal and interest payments.

One issuer of a trust preferred security the Corporation holds is a bank holding company, headquartered in Michigan that owns commercial banks in several states. The Corporation received a third party valuation of this security and noted the cost basis exceeded the fair value of the security. Upon further analysis, the Corporation noted that the underlying issuer commenced deferral of interest payments on this trust preferred security for up to a period of five years. This issuer has been negatively impacted by the downturn in the economy and the asset quality issues that have impacted the financial services industry in the Michigan market. Various subsidiary banks held by this issuer have been downgraded to adequately-capitalized status as of September 30, 2009. The Corporation believes that based upon the continued deterioration of asset quality and regulatory capital ratio of this issuer results in an other-than-temporary impairment that is credit related. As a result, the Corporation recorded an other-than-temporary impairment charge of $414,000 through the income statement during the year ended December 31, 2009.

Certain debt securities have experienced fair value deterioration due to credit losses, as well as due to other market factors, but are not otherwise other-than-temporarily impaired. The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income.


Credit losses on debt securities held	Amount
Balance, January 1, 2009	$	—
Additions related to other than temporary losses not previously recognized		414

Balance, December 31, 2009	$	414

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE D — LOANS

Major categories of loans included in the portfolio at December 31 are as follows (in thousands):


							Percent
	2009			2008			Incr(decr)

Consumer loans	$	29,386		$	31,864			(7.78	%)
Commercial, financial, & other		144,630			164,740			(12.21	%)
Construction and land development loans		83,464			113,035			(26.16	%)
Commercial real estate mortgages		531,156			571,204			(7.01	%)
Residential real estate mortgages		44,500			52,426			(15.12	%)


Total loans		833,136			933,269			(10.73	%)

Allowance for loan losses		(35,125	)		(14,452	)


Loans, net	$	798,011		$	918,817

Certain directors and executive officers of the Corporation, including their related interests, were loan customers of the Bank during 2009 and 2008. These loan transactions for the years ended December 31, are as follows (in thousands):


	2009			2008
Balance, beginning of year	$	2,042		$	2,494
New loans during period		—			9
Repayments made during period		(946	)		(461	)

Balance, end of period	$	1,096		$	2,042

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE D — LOANS (Continued)

Activity in the allowance for loan losses for the years ended December 31 are as follows (in thousands):


	2009			2008

Balance, beginning of year	$	14,452		$	10,617

Less charge-offs:
Consumer loans		1,154			318
Commercial, financial & other		4,878			4,304
Construction and land development loans		17,257			3,604
Commercial real estate mortgages		6,919			2,446
Residential loans		701			296

Plus recoveries:
Consumer loans		176			19
Commercial, financial & other		339			117
Construction and land development loans		107			36
Commercial real estate mortgages		61			21
Residential loans		36			4


Net charge-offs (recoveries)		30,190			10,771

Provision for loan losses		50,863			14,606


Balance at end of period	$	35,125		$	14,452


Allowance to total loans		4.22	%		1.55	%


Net charge-offs to average loans		3.41	%		1.14	%

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE D — LOANS (Continued)

The aggregate balances in impaired loans at December 31, are as follows (in thousands):


	2009		2008

Impaired loans with no allocated allowance for loan losses	$	83,226	$	71,961
Impaired loans with allocated allowance for loan losses		43,553		26,908


Total	$	126,779	$	98,869


Amount of the allowance for loan loss allocated to impaired loans	$	10,715	$	5,273

Average of impaired loans during the year	$	102,550	$	82,436

Interest income recognized during impairment	$	2,349	$	1,460
Cash-basis interest income recognized	$	2,149	$	—

Non-performing assets were as follows (in thousands):


	2009		2008

Troubled debt restructuring and still accruing	$	59,420	$	17,765
Over 90 days past due and still accruing		—		450
Non-accrual loans		49,341		51,708

Total non performing loans		108,761		69,923

Real estate owned		23,435		9,657
Other repossessed assets		—		—

Other non performing assets		23,435		9,657

Total nonperforming assets	$	132,196	$	79,580

Impaired loans and non-performing loans are defined differently. Impaired loans are loans for which the collection of principal and interest according to the contractual terms of the agreement is not probable. Non-performing loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

Non-performing loans included troubled debt restructuring of $59,420,000 at December 31, 2009. These loans were qualified as troubled debt restructuring due to changes from principal and interest payments to interest only payments, reduction of interest rates, or the lengthening of the amortization. Valuation allowances in the amount of $5,452,000 were recorded against the loans. At December 31, 2009, 3 loans classified as troubled debt restructuring amounting to $2,705,000 were not current according to their renegotiated terms.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE E — PREMISES AND EQUIPMENT

Premises and equipment are comprised of the following at December 31 (in thousands):


	2009		2008

Land and improvements	$	7,728	$	7,728
Building and improvements		14,553		14,553
Furniture and equipment		6,988		6,771

		29,269		29,052

Less accumulated depreciation		9,075		7,780


	$	20,194	$	21,272

Depreciation expense for 2009 and 2008 amounted to $1,335,000 and $1,355,000, respectively. Capital expenditures were primarily due to various improvements in technology.

Rent expense for facilities of $1,009,000 and $1,064,000 was incurred during 2009 and 2008, respectively. Rental commitments under noncancellable operating leases are as follows, before considering renewal options that generally are present (in thousands):


2010	$	649
2011		439
2012		48
2013		24


Total	$	1,160

NOTE F — GOODWILL AND OTHER INTANGIBLE ASSETS

The Corporation acquired Fidelity Financial Corporation of Michigan (Fidelity) and the Bank of Washtenaw (Washtenaw) in January of 2007 and October of 2004, respectively. As a result of these acquisitions, the Corporation acquired goodwill and other intangible assets. The Corporation recorded amortization expense of $595,000 and $968,000 in 2009 and 2008, respectively. Goodwill amounted to $0 at December 31, 2009 and 2008.

The carrying basis and accumulated amortization and impairment of intangible assets at December 31, 2009 and 2008, were:

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE F — GOODWILL AND OTHER INTANGIBLE ASSETS (Con’t)


	2009
	Gross Carrying		Accumulated		Accumulated
	Amount		Amortization		Impairment Charge

Core deposit intangible	$	7,792	$	2,389	$	5,403
Borrower relationship intangible		5,178		2,023		3,155

Total intangible assets	$	12,970	$	4,412	$	8,558


	2008
	Gross Carrying		Accumulated		Accumulated
	Amount		Amortization		Impairment Charge

Core deposit intangible	$	7,792	$	2,044	$	2,991
Borrower relationship intangible		5,178		1,773		1,570

Total intangible assets	$	12,970	$	3,817	$	4,561

During the fourth quarter of 2008, the significant decline in the market value of the Corporation’s stock below its book value and the decline in the economic environment in which the Corporation operates caused management to engage a third party business valuation specialist to perform the annual impairment test of goodwill and other intangible assets. The third party specialist used three methods of evaluation to determine the fair value of the reporting unit, Fidelity Bank. These methods considered the Bank’s discounted future earnings, the stock price of the Corporation and other comparable financial institutions and the equity values of other companies that have been sold. The value of each approach was weighted and an overall summary of the Bank’s fair value was calculated.

The step one impairment test indicated that the implied fair value of Fidelity Bank was well below the carrying amount as of December 31, 2008. Subsequently, management performed its own internal step two impairment testing by allocating the implied fair value of the Bank to all of the assets and liabilities of the reporting unit. The implied fair value of the Bank was then compared to the actual carrying amount of goodwill. From this testing, management determined the carrying amount of goodwill exceeded in its entirety the implied fair value of goodwill.

The changes in the carrying amount of goodwill for the year ended December 31, 2008 were as follows:


	Amount

Balance, January 1, 2008	$	34,028
Impairment loss during 2008		(34,028	)

Balance, December 31, 2008	$	—

The impairment to the core deposit intangibles was primarily due to the erosion of core deposits at a faster rate than anticipated. The impairment of the customer relationship intangible is primarily due to the migration of loans at a more rapid rate than expected and the impact of current economic conditions on the loan portfolio. The impairment during 2009 left no residual value in these intangible assets.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE G — DEPOSITS

Time deposits of $100,000 or more were $303,411,000 and $324,420,000 at December 31, 2009 and 2008, respectively. Time deposits of $100,000 or more from governmental units, which are included in total time deposits of $100,000 or more were $4,366,000 and $38,999,000 at December 31, 2009 and 2008, respectively.

Scheduled maturities of time deposits at December 31, 2009 are listed in the following table (in thousands):


	$100,000 and over		Less than $100,000		Total

2010	$	277,729	$	274,181	$	551,910
2011		24,367		26,534		50,901
2012		802		587		1,389
2013		—		187		187
2014 and thereafter		513		340		853


Totals	$	303,411	$	301,829	$	605,240

Related party deposits from directors and executive officers of the Corporation were approximately $4,233,000 and $6,701,000 at December 31, 2009 and 2008, respectively.

NOTE H — SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase are secured by US government entity securities with a carrying amount of zero and approximately $3.0 million at December 31, 2009 and 2008, respectively.

Securities sold under agreements to repurchase are financing arrangements that mature within two years. At maturity, the securities underlying the agreements are returned to the Corporation. Information concerning securities sold under agreements to repurchase is summarized as follows (in thousands):


	2009			2008

Balance at year-end	$	—		$	2,461
Average daily balance during the year	$	1,966		$	778
Average interest rate during the year		1.25	%		1.25	%
Maximum month-end balance during year	$	2,539		$	2,461
Weighted average interest rate at year-end		1.25	%		1.25	%

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE I — FEDERAL HOME LOAN BANK ADVANCES

The Bank has entered into an Advances, Pledge and Security Agreement with the Federal Home Loan Bank of Indianapolis (FHLB). Advances were $63,855,000 and $65,019,000 at December 31, 2009 and 2008, respectively. These advances can carry a fixed or floating rate of interest and are secured by a physical collateral agreement with the Federal Home Loan Bank of Indianapolis covering eligible mortgage loans in the amount of $39,169,000, commercial real estate loans in the amount of $99,463,000 and securities available for sale in the amount of $101,000. Federal Home Loan Bank advances are comprised of the following at December 31, 2009 and 2008 (in thousands):


At December 31, 2009
			Weighted
Maturing in:	Amount		Average Rate

2010	$	49,084		2.19	%
2011		4,500		3.20	%
2012		271		5.27	%
2013		10,000		2.58	%

Total	$	63,855		2.33	%


At December 31, 2008
			Weighted
Maturing in:	Amount		Average Rate

2009	$	20,000		4.76	%
2010		30,184		3.27	%
2011		4,500		3.20	%
2012		335		5.27	%
2013		10,000		2.58	%

Total	$	65,019		3.63	%

The Bank makes monthly interest payments with principal generally due at maturity. Prepayment penalties apply if advances are repaid prior to maturity. The Bank’s capacity to borrow from the Federal Home Loan Bank is capped at $100 million by a resolution of the Board of Directors of the Bank. The Bank had the ability to borrow up to $66.6 million based on collateral pledged by the Bank at December 31, 2009.

Required payments over the next five years are as follows:


	Amount

2010	$	49,139
2011		4,548
2012		168
2013		10,000


Total	$	63,855

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE I — FHLB ADVANCES (Continued)

Amounts advanced by the FHLB totaling $10,000,000 are subject to an option for the FHLB to convert the entire advance to a periodic adjustable rate one year after the date of the advance. If the FHLB exercises its option to convert the advance to an adjustable rate, the advance will be pre-payable at the Corporation’s option, at par without a penalty.

NOTE J — SUBORDINATED DEBENTURES

In 2002, Dearborn Bancorp Trust I, a special purpose entity formed by the Corporation, issued $10,000,000 of floating rate mandatory redeemable securities as part of a pooled offering. The Corporation issued $10,000,000 of subordinated debentures to the trust in exchange for the proceeds of the offering. The interest rate on the debentures is the three month LIBOR plus 3.35% and was 3.63% at December 31, 2009. The securities have a term of thirty years with interest payments due on a quarterly basis. The Corporation may redeem the debentures, with regulatory approval, at face value.

On August 28, 2009, the Corporation elected to defer regularly scheduled quarterly interest payments on Dearborn’s junior subordinated debentures (“Debentures”). While the Corporation defers the payment of interest, it will continue to accrue the interest expense owed at the applicable interest rate. At the expiration of the deferral period, all accrued and unpaid interest is due and payable.

NOTE K — INCOME TAXES

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


	2009			2008

Current		($8,785	)		($2,370	)
Deferred		16,794			(14,117	)

	$	8,009			($16,487	)

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE K — INCOME TAXES (Continued)

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


	2009			2008

Deferred tax assets
Allowance for loan losses	$	11,943		$	4,913
Net operating loss carryforward		734			—
Goodwill and other intangibles		12,505			11,877
Capital loss carryforward		251			251
Non accrual interest income		14			92
Writedowns on other real estate owned		1,070			462
Amortization of deferred issue costs		263			81
Other		11			63


Total deferred tax assets		26,791			17,739

Deferred tax liabilities
Premises and equipment		(423	)		(300	)
Prepaid expenses		(283	)		(259	)
Unrealized losses on securities available for sale		—			(104	)
Deferred loan fees and costs		(130	)		(73	)
Other		(104	)		(66	)


Total deferred tax liabilities		(940	)		(802	)

Less: valuation allowance		(25,851	)		(251	)


Net deferred tax asset	$	—		$	16,686

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE K — INCOME TAXES (Continued)

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.

The Corporation is no longer subject to examination by the Internal Revenue Service for years before 2007.

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


	2009			2008

Federal income tax rate		34	%		34	%
Effect of capital loss carryback valuation allowance		(48	%)		—	%
Other, net		(1	%)		—	%


Effective tax rate		(15	%)		34	%

NOTE L — DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

Fair Value of Financial Instruments

The following methods and assumptions were used by the Corporation in estimating its fair value disclosure for financial instruments:

Cash and Cash Equivalents, Securities Sold Under Agreements to Repurchase, Interest-bearing Deposits and Federal Home Loan Bank Stock

The carrying amount approximates fair value.

Held-to-maturity Securities

Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans Held for Sale

Fair value is based upon the quoted price for the sale of those loans.

Loans

The fair value of loans is estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE L — DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued)

Deposits

Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

Interest Receivable and Interest Payable

The carrying amount approximates fair value.

Federal Home Loan Bank Advances

Rates currently available to the Corporation for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. Fair value of long-term debt is based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market. If a quoted market price is not available, an expected present value technique is used to estimate fair value.

Subordinated Debentures

Rates currently available to the Corporation for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.

Commitments to Originate Loans, Forward Sale Commitments, Letters of Credit and Lines of Credit

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of forward sale commitments is estimated based on current market prices for loans of similar terms and credit quality. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of such arrangements are not considered material to this presentation.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE L — DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued)

The estimated fair value of the Corporation’s financial instruments at December 31 are as follows (in thousands):


	At December 31, 2009				At December 31, 2008
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets:
Cash and cash equivalents	$	77,497	$	77,497	$	53,002	$	53,002
Mortgage loans held for sale		1,129		1,146		1,834		1,858
Securities available for sale		45,964		45,964		84,148		84,148
Federal Home Loan Bank Stock		3,698		3,698		3,614		3,614
Loans, net		833,136		829,122		933,269		934,826
Accrued interest receivable		3,562		3,562		3,499		3,499

Liabilities:
Deposits		867,955		871,177		938,395		945,017
Securities sold under agreements to repurchase		—		—		2,461		2,461
Federal Home Loan Bank advances		63,855		64,275		65,019		66,390
Subordinated debentures		10,000		4,081		10,000		10,028
Accrued interest payable		1,046		1,046		1,695		1,695

Effective January 1, 2008, the Corporation adopted ASC 820 (formerly SFAS 157) Fair Value Measurements” (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 has been applied prospectively as of the beginning of 2008.

ASC 820 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. ASC 820 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.

Level 2 securities are valued by a third party pricing service commonly used in the banking industry, utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury curve, trade execution data, market consensus prepayment spreads and available credit information. The pricing provided utilizes evaluated pricing models that are 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 and matrix pricing.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE L — DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued)

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

One component of the Corporation’s securities, available for sale are money market funds that are based on quoted prices in active markets and are classified within Level 1 of the valuation hierarchy. The values of all other 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 ASC 820 fair value hierarchy in which the fair value measurements fall at December 31, 2009 and 2008 (in thousands):


			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
At 12/31/2009	Fair Value		(Level 1)		(Level 2)		(Level 3)
US Government sponsored entity securities	$	12,749	$	—	$	12,749	$	—
Corporate bonds		33,111		—		33,111		—
Mortgage backed securities		104		—		104		—


Total securities, available for sale	$	45,964	$	—	$	45,964	$	—

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE L — DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued)


			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
At 12/31/2008	Fair Value		(Level 1)		(Level 2)		(Level 3)
US Government sponsored entity securities	$	21,399	$	—	$	21,399	$	—
Corporate bonds		13,235		—		13,235		—
Municipal securities		1,331		—		1,331		—
Mortgage backed securities		183		—		183		—
Money market mutual funds		48,000		48,000		—		—


Total securities, available for sale	$	84,148	$	48,000	$	36,148	$	—

Following is a description of the valuation methodology for assets and liabilities measured at fair value on a non-recurring basis and recognized in the accompanying balance sheet.

Impaired Loans (Collateral Dependent)

Loans for which it is probable that the Corporation will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Real Estate Owned

The fair value of other real estate owned is measured based on the value of the collateral securing those loans/real estate and is determined using several methods. The fair value of real estate is generally determined based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis. Fair value on the collateral such as business assets is typically calculated by using financial information such as financial statements and aging reports provided by the borrower and is discounted as considered appropriate.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE L — DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued)

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 ASC 820 fair value hierarchy in which the fair value measurements fall at December 31, 2009 (in thousands):

Quoted

Prices in

Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

At 12/31/2009

Fair Value

(Level 1)

(Level 2)

(Level 3)

Loans

60,905

—

60,905

Other real estate

7,601

—

7,601

Quoted

Prices in

Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

At 12/31/2008

Fair Value

(Level 1)

(Level 2)

(Level 3)

Loans

41,907

—

41,907

Other real estate

4,833

—

4,833

NOTE M — COMMITMENTS AND CREDIT RISK

Loan Commitments

Some financial instruments, such as loan commitments, credit lines, letters of credit and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same policies are used to make such commitments as are used for loans, including obtaining collareral at exercise of the commitment.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE M — COMMITMENTS AND CREDIT RISK (Con’t)

The Corporation had outstanding loan commitments aggregating $77,919,000 and $113,868,000 at December 31, 2009 and 2008, respectively. Loan commitments for variable rate loans were $61,420,000 and $83,043,000 at December 31, 2009 and 2008, respectively. Loan commitments for fixed rate loans were $16,499,000 and $25,484,000 at December 31, 2009 and 2008, respectively. The fixed rate loan commitments at December 31, 2009 have interest rates ranging from 3.00% to 9.50% and maturities ranging from one year to five years. A distribution of outstanding loan commitments by contractual maturity is shown below (in thousands):


	Commitment Period
	Less
	than 1		1 - 3		3 - 5		Over 5
At December 31, 2009	year		years		years		years		Totals
Home equity lines of credit	$	355	$	3,073	$	4,208	$	8,695	$	16,331
Residential loan commitments		132		—		—		—		132
Standby letters of credit		770		1,932		—		—		2,702
Lines of credit — commercial		29,527		2,709		731		27		32,994
Commercial construction — residential land development and construction		5,134		286		735		—		6,155
Other commercial commitments		16,668		1,693		1,244		—		19,605


Totals	$	52,586	$	9,693	$	6,918	$	8,722	$	77,919


	Commitment Period
	Less
	than 1		1 - 3		3 - 5		Over 5
At December 31, 2008	year		years		years		years		Totals
Home equity lines of credit	$	158	$	1,058	$	5,920	$	10,461	$	17,597
Residential loan commitments		5,477		—		—		—		5,477
Standby letters of credit		2,945		27		2,000		—		4,972
Lines of credit — commercial		42,723		4,253		1,016		538		48,530
Commercial construction — residential land development and construction		10,486		3,180		115		—		13,781
Other commercial commitments		15,774		2,758		3,488		1,491		23,511


Totals	$	77,563	$	11,276	$	12,539	$	12,490	$	113,868

Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require a payment of a fee. Since portions of the commitments are expected to expire without being drawn upon, the total commitments do not necessarily represent future cash requirements. The Corporation evaluates each customer’s credit worthiness on a case by case basis. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the customer.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE N — EMPLOYEE BENEFIT PLANS

The Bank maintains a 401(k) plan for its employees. All employees are eligible to participate in the 401(k) plan after completion of age and service requirements. An employee can be enrolled as a participant on the first “Enrollment Date” after reaching age 18 and completing six months of service.

Contributions to the plan by the Bank are discretionary and are expensed as made. Historically, the Bank had matched 50% of the first 6% of employee contributions to the plan. Employer contributions vest 20% per year for five years. As of October 1, 2009, the Bank discontinued the practice of matching employee contributions to the plan due to the declining performance of the Bank during the recent economic downturn.

During 2009 and 2008, employer contributions were $203,000 and $243,000, respectively.

NOTE O — REGULATORY CAPITAL REQUIREMENTS

The Corporation and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and, additionally for the Bank, the regulatory framework for prompt corrective action, the Corporation and Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Under the Consent Order dated February 12, 2010, the Bank is required to achieve and maintain tier 1 capital as a percentage of total assets of 9% or higher and total capital as a percentage of risk-weighted assets of 12% or higher within 120 days from the effective date of the order.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE O — REGULATORY CAPITAL REQUIREMENTS

Quantitative measures established by regulation require the Corporation and Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). The following is a presentation of the Corporation’s and Bank’s regulatory capital ratios (in thousands):


											Minimum
						Minimum					To Be Well Capitalized
						for Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of December 31, 2009
Total capital (to risk weighted assets)
Consolidated		63,043		7.39	%		68,264		8.00	%		N/A		N/A
Bank		61,169		7.19	%		68,105		8.00	%		85,132		10.00	%
Tier 1 capital (to risk weighted assets)
Consolidated		52,080		6.10	%		34,132		4.00	%		N/A		N/A
Bank		50,225		5.90	%		34,053		4.00	%		51,079		6.00	%
Tier 1 capital (to average assets)
Consolidated		52,080		4.98	%		41,838		4.00	%		N/A		N/A
Bank		50,225		4.81	%		41,776		4.00	%		52,220		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	%

At December 31, 2009, the Bank was undercapitalized. At December 31, 2008, the Bank was well capitalized. There are no conditions or events since that notification that management believes have changed the institution’s category. Federal and state banking laws and regulations place certain restrictions on the amount of dividends and loans a bank can pay to its parent company. No cash dividends have ever been paid by the Corporation.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE P — 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 814,449 shares. Exercise price is the market price at date of grant. The maximum option term is ten years, and options vest fully after six months from the date of grant. No options are available for grant under this plan.

A summary of the option activity in the 1994 Plan follows:


			Weighted
			Average
	Options		Exercise
	Outstanding		Price
Outstanding at January 1, 2009		360,398	$	8.65
Exercised		—	$	0.00
Forfeited		—	$	0.00

Outstanding At December 31, 2009		360,398	$	8.65

At December 31, 2009 and 2008 respectively, 360,398 options were exercisable at weighted average exercise price of $8.65.

There were no options exercised during 2008 or 2009. The options outstanding at December 31, 2008 or 2009 had no intrinsic value.

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, shares, share units or performance awards.

The administration of the plan, including the granting of awards and the nature of those awards, is determined by the Corporation’s Compensation Committee. The Corporation’s Board of Directors approved grants of performance-based stock options and restricted stock in 2005 and 2006. The Corporation’s Board of Directors approved grants of stock options and restricted stock without performance criteria in 2008. The awards have a term of ten years and typically vest fully three years from the grant date.

Stock Options Granted — The incentive stock options were granted with the exercise price equal to market price on the day of grant. The weighted average fair value of the options granted at grant date was $1.56. The following assumptions were used to determine the fair value of the options granted in 2008:


	2008

Risk-free interest rate		2.92	%
Expected option life	7.0 years
Dividend yield		0.00	%
Expected volatility of stock price		28.39	%

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE P — INCENTIVE STOCK PLANS

A summary of the 2005 Plan’s option activity is as follows:


				Weighted
	Number			Exercise
	of Shares			Price

Outstanding at January 1, 2009		205,662		$	5.89
Shares Forfeited — Stock Options		(14,816	)	$	13.06

Outstanding at December 31, 2009		190,846		$	5.33

During the year ended December 31, 2009, the Corporation recognized compensation expense of $69,000 related to stock options. Compensation cost of $62,000 and $42,000 is expected to be recognized during 2010 and 2011, respectively.

Stock Grants — Stock awards are granted to officers. A summary of the plan’s stock award activity is as follows:


	Number
	of Shares

Outstanding at January 1, 2009		52,016
Restricted Shares Forfeited		(8,734	)
Restricted Shares Transferred to Common Shares		(1,752	)

Outstanding at December 31, 2009		41,530

During the year ended December 31, 2009, the Corporation recognized compensation expense of $76,000 related to restricted stock. Compensation cost of $62,000 and $41,000 is expected to be recognized during 2010 and 2011, respectively. The fair value of shares vested during 2008 was $81,000.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE Q — EARNINGS PER SHARE

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


	2009			2008
Basic
Net loss		($61,175	)		($31,925	)

Weighted average common shares		7,645,076			8,007,345

Basic earnings per common share		($8.00	)		($3.99	)

Diluted
Net loss		($61,175	)		($31,925	)

Weighted average common shares outstanding for basic earnings per common share		7,645,076			8,007,345

Average shares and dilutive potential common shares		7,645,076			8,007,345

Dilutive earnings per common share		($8.00	)		($3.99	)

All stock options and unvested shares were excluded from the computation of diluted earnings per share for 2009 and 2008 because they were antidilutive. All share and per share amounts have been adjusted for stock dividends.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE R — PARENT ONLY CONDENSED FINANCIAL INFORMATION

The condensed financial information that follows presents the financial condition of the parent company, Dearborn Bancorp, Inc., along with the results of its operations and its cash flows.

CONDENSED BALANCE SHEETS


	December 31,
(In thousands)	2009		2008
ASSETS
Cash and cash equivalents	$	116	$	635
Investment in subsidiary		50,090		111,148
Other assets		1,994		1,631


Total assets	$	52,200	$	113,414


LIABILITIES AND STOCKHOLDERS’ EQUITY
Other liabilities	$	255	$	103
Subordinated debentures		10,000		10,000


Total liabilities		10,255		10,103

Stockholders’ equity		41,945		103,311


Total liabilities and stockholder’s equity	$	52,200	$	113,414

CONDENSED STATEMENTS OF INCOME


	Years Ended December 31,
(In thousands)	2009			2008

Interest income	$	—		$	7
Dividends from Bank		—			3,500
Interest expense		411			740
Other operating expenses		291			1,104


Net loss before income tax and equity in undistributed income of subsidiary		(702	)		1,663
Income tax benefit		43			702


Net loss before equity in undistributed income of subsidiary		(659	)		2,365

Equity in undistributed income of subsidiary (dividends in excess of earnings)		(60,516	)		(34,290	)


Net loss		($61,175	)		($31,925	)

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE R — PARENT ONLY CONDENSED FINANCIAL INFORMATION (Continued)

CONDENSED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
(In thousands)	2009			2008
Cash flows from operating activities
Net loss		($61,175	)		($31,925	)
Adjustments to reconcile net income to net cash provided by operating activities (Equity in undistributed income of subsidiary) dividends in excess of earnings		60,516			34,290
Other, net		140			181

Net cash flows provided by (used in) operating activities		(519	)		2,546

Cash flows from the repurchase of common stock		—			(2,627	)

Decrease in cash and cash equivalents		(519	)		(81	)

Cash and cash equivalents at the beginning of year		635			716


Cash and cash equivalents at end of year	$	116		$	635

NOTE S — QUARTERLY FINANCIAL DATA (UNAUDITED)

(In thousands, except per share data)


	Interest		Net Interest		Net			Earnings per share
	Income		Income		Income			Basic			Fully diluted
2009
First quarter	$	14,166	$	7,517		($6,249	)		($0.81	)		($0.81	)
Second quarter		13,573		7,537		(9,075	)		(1.19	)		(1.19	)
Third quarter		13,246		7,826		(40,045	)		(5.24	)		(5.24	)
Fourth quarter		13,268		8,006		(5,806	)		(0.76	)		(0.76	)

2008
First quarter	$	16,299	$	8,053	$	676		$	0.08		$	0.08
Second quarter		15,125		8,284		(4,614	)		(0.57	)		(0.57	)
Third quarter		14,863		8,250		1,420			0.18			0.18
Fourth quarter		14,839		7,544		(29,407	)		(3.77	)		(3.77	)

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2009 and 2008

NOTE T — SIGNIFICANT ESTIMATES AND CONCENTRATIONS

Current Economic Conditions

The current protracted economic decline presents financial institutions with unprecedented circumstances and challenges which in some cases have resulted in large declines in the fair values of investments and other assets, constraints on liquidity and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. The financial statements have been prepared using values and information currently available to the Corporation.

The Corporation is further affected by the economic conditions specific to Southeastern Michigan due to the importance of the automobile industry to the local economy. While the Corporation does not have significant exposure to automobile manufacturers and suppliers, the downturn in the automotive industry has had an adverse effect on many of the Corporation’s borrowers and the Corporation’s allowance for loan losses.

The Corporation’s allowance for loan losses contains certain assumptions on the value of collateral dependent loans as well as certain economic and industry conditions which may be subject to change within the next year. These changes could have an adverse impact on the allowance for loan losses in the near term.

Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses and capital which could negatively impact the Corporation’s ability to meet regulatory capital requirements and maintain sufficient liquidity.

Loan Concentrations

Our lending operations may be subject to enhanced scrutiny by banking regulators based on our concentration of commercial real estate loans (“CRE”). CRE loans generally include land development, construction loans and loans secured by multifamily property, and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property.

As of December 31, 2009, our concentration of construction, land development and other land loans totaled 199.0% and our CRE concentration, net of owner-occupied loans, as a percentage of capital totaled 997.0%.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS

Company Overview and Executive Summary

Dearborn Bancorp, Inc. (the “Corporation”) 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. The Bank was renamed Fidelity Bank on April 30, 2007. 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.

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.

The Corporation completed the acquisition of Fidelity Financial Corporation of Michigan (Fidelity), a commercial bank with seven offices in Oakland County, Michigan on January 4, 2007. The acquisition significantly expanded the Bank’s presence in Oakland County, Michigan. Management believes that the acquisition has been beneficial to the Bank’s customers and the Corporation’s shareholders.

The Bank currently operates seventeen banking offices in Wayne, Macomb, Oakland and Washtenaw Counties, Michigan. A list of banking offices is shown on page 55.

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 strong asset quality and efficient operations. Management continually monitors the quality of the loan portfolio and the impact of the economic and competitive environment and takes appropriate measures to maintain high 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. Despite the local economy and its impact on certain industries, many local industries and economies are performing well. The Bank has attempted to maintain asset quality in this environment by enforcing strong underwriting guidelines and utilizing a diligent loan review process. Despite these measures, the Bank has recorded charge-offs of certain loans, as the value of the underlying collateral of certain non-performing loans has continued to decline. Additionally, the carrying values of real estate owned properties have been adjusted appropriately, as the market value of the real estate has declined.

The Corporation recorded a net loss of ($61,175,000) during 2009, compared to a net loss of ($31,925,000) during 2008. The factors that contributed primarily to the decline in earnings during 2009 were various costs related to the Bank’s non-performing assets such as provision for loan losses, the write-down and loss on sale of other real estate and defaulted loan expense, the recording of a valuation allowance on the Corporation’s deferred tax asset, the impairment of intangible assets and the increase in FDIC assessment expense.

The most significant factor in the decline in earnings during 2009 was the costs related to the Bank’s non-performing assets. The Corporation recorded provision for loan loss of $50,863,000 during 2009 compared to $14,606,000 during 2008. The provision for loan losses is determined by the internal analysis of the allowance for loan losses and the large increase during 2009 was the result of a higher level of non-performing loans and net charge-offs. Net charge-offs amounted to $30,190,000 during 2009 compared to $10,771,000 during 2008. The Corporation also recorded $2,905,000 for the write-down and loss on sale of other real estate in 2009 compared to $3,037,000 during 2008. The Corporation also recorded defaulted loan expense of $4,624,000 during 2009 compared to $2,078,000 during 2008. The increase in defaulted loans expense was due to the property tax expense and other holding costs related to the increased amount of collateral transferred to real estate owned during 2009.

Another significant factor in the loss recorded during 2009 was the recording of a valuation allowance against the deferred tax asset in the amount of $25,851,000. This non-cash charge eliminates the Corporation’s deferred tax asset in its entirety.

Another factor was the impairment of intangibles assets during 2009, which amounted to $3,997,000. The impairment to the core deposit intangibles was primarily due to the erosion of core deposits at a faster rate than anticipated and the transfer of core deposits to time deposits. The impairment of the customer relationship intangible is primarily due to the migration of loans at a more rapid rate than expected and the impact of current economic conditions on the loan portfolio.

The Corporation also recorded addition FDIC assessment expense during 2009. FDIC assessment expense amounted to $2,843,000 during 2009 compared to $696,000 in 2008, an increase of $2,147,000. This increase was primarily due to a special assessment charged to banks and the increased assessment rates charged during 2009

As a result of the loss recorded during 2009, the capitalization status of the Bank declined from well capitalized to undercapitalized. As a result of the decline in the Bank’s capitalization level, the Bank is limited in its utilization of brokered deposits. The Bank is also restricted in the setting of deposit interest rates. Additionally, there are limitations in the borrowing terms and capacity with the Federal Reserve Bank.

The loss incurred during 2009 was largely driven by problems related to the increase in the Bank’s level of non-performing assets. Management has continued to supplement its Special Assets Department, which is responsible for the management of most non-performing loans and the liquidation of real estate owned. During 2009. the Bank continued to provide additional resources to this department by adding a Special Assets Manager and an additional loan officer in this department. The reduction of non-performing assets is a primary objective of management and is critical to the future success of the Corporation.

On February 12, 2010, the Bank received a Consent Order that is effective February 22, 2010 from the FDIC and OFIR, its principal regulators, subsequent to a safety and soundness exam which outlined a variety of requirements to fulfill within certain timelines.

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 below:


Date Opened	Location	Type of office
February 1994	22290 Michigan Avenue Dearborn, Michigan 48123	Full service retail branch with ATM

December 1995	24935 West Warren Avenue Dearborn Heights, Michigan 48127	Full service retail branch

August 1997	44623 Five Mile Road Plymouth, Michigan 48170	Full service retail branch with ATM

May 2001	1325 North Canton Center Road Canton, Michigan 48187	Full service retail branch with ATM

December 2001	45000 River Ridge Drive Clinton Township, Michigan 48038	Regional lending center

November 2002	19100 Hall Road Clinton Township, Michigan 48038	Full service retail branch with ATM

February 2003	12820 Fort Street Southgate, Michigan 48195	Full service retail branch with ATM

May 2003	3201 University Drive, Suite 180 Auburn Hills, Michigan 48326	Full service retail branch

October 2004	450 East Michigan Avenue Saline, MI 48176	Full service retail branch with ATM

October 2004	250 West Eisenhower Parkway Ann Arbor, MI 48103	Full service retail branch Regional lending center

December 2004	1360 Porter Street Dearborn, MI 48123	Loan production office Regional lending center

January 2007	1040 East Maple Birmingham, MI 48009	Full service retail branch with ATM Regional lending center

January 2007	3681 West Maple Bloomfield Township, MI 48301	Full service retail branch with ATM

January 2007	30700 Telegraph, Suite Bingham Farms, MI 48025	Full service retail branch with ATM

January 2007	20000 Twelve Mile Road Southfield, MI 48076	Full service retail branch with ATM

January 2007	200 Galleria Office Center, Suite 141 Southfield, MI 48134	Full service retail branch with ATM

April 2007	7755 23 Mile Road Shelby Township, Mi 48316	Full service retail branch with ATM

Forward-Looking Statements

The following discussion contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Corporation and Bank. 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. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. The Corporation 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; and changes in the national and local economy. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

Critical Accounting Policies and Estimates

The “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as disclosures found elsewhere in the annual report, are based upon the consolidated financial statements of Dearborn Bancorp, Inc., which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires Dearborn Bancorp, Inc. to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses. Actual results could differ from those estimates.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses in the loan portfolio. Management’s evaluation of the adequacy of the allowance for loan losses is an estimate based primarily on reviews of individual loans, assessments of the impact of current economic conditions on the portfolio, and historical loss experience. See Note D of the Notes to Consolidated Financial Statements and the discussion of “Allowance for Loan Losses” in the Management’s Discussion and Analysis.

Management believes the accounting estimates related to the allowance for loan losses is a “critical accounting estimate” because:

	1)		The estimates are highly susceptible to change from period to period and require management to make judgements concerning the quality of the loan portfolio and the impact of current economic conditions on borrowers’ ability to repay their loans.

	2)		The impact of recognizing an impairment or loan loss could have a material effect on the financial statements of Dearborn Bancorp, Inc.

Management has discussed the development and selection of these critical accounting estimates with the audit committee of the board of directors and the audit committee has reviewed the Corporation’s disclosures related to them in this Management’s Discussion and Analysis.

Results of Operations

2009 Compared to 2008.The Corporation reported a net loss of ($61,175,000) in 2009 compared to a net loss of ($31,925,000) in 2008, a decrease of $29,250,000. The loss in 2009 included a non-cash impairment charge for the impairment of other intangible assets in the amount of $3,997,000, a non-cash charge for the recording of a valuation allowance on the Corporation’s deferred tax asset in the amount of $25,581,000 and a non-cash benefit for the extended period of time that net operating losses could be carried back. This increase in the period that losses can be carried back, resulted in a refund of $5,452,000. When these non-cash charges and benefits are excluded from net income, the Corporation’s net loss is ($37,503,000), compared to a net loss of ($5,788,000) for 2008, an increase in the loss of $31,715,000.

The larger net loss during 2009 is due primarily to the provision for loan loss, the recording of a valuation allowance against the Corporation’s deferred tax asset, FDIC assessment and defaulted loan expense. The Corporation recorded provision for loan losses of $50,863,000 during 2009 compared to $14,606,000 during 2008. The provision for loan losses is determined by the internal analysis of the allowance for loan losses and the large increase during 2009 was the result of a higher level of non-performing loans and net charge-offs. Net charge-offs amounted to $30,190,000 during 2009 compared to $10,771,000 during 2008.

The Corporation also incurred FDIC expense of $2,843,000 during 2009, compared to $696,000 during 2008. The increase in FDIC expense was due to the special assessment levied by the FDIC and the increased assessment rate for the fourth quarter. The Corporation also recorded defaulted loan expense of $4,624,000 during 2009 compared to $2,078,000 during 2008.

Income during 2009 was also impacted by a compression in the Corporation’s net interest margin compared with 2008. This was the result of the increase in non-performing loans and the decline in short term interest rates.

2008 Compared to 2007.The Corporation reported a net loss of ($31,925,000) in 2008 compared to net income of $3,166,000 in 2007, a decrease of $35,091,000. The Corporation’s decline in net income was primarily due to a non cash impairment charge for the impairment of goodwill and other intangible assets. If the after-tax impact of this impairment charge is excluded, the Corporation’s net loss would be ($5,788,000), compared to net income of $3,166,000 in 2007, a decrease of $8,954,000. The decrease in net income excluding the impairment charge is primarily due to the provision for loan loss, other costs related to the Bank’s non-performing assets and the decline in net interest income.

Net Interest Income

2009 Compared to 2008.Net interest income in 2009 was $30,886,000 compared to $32,131,000 in 2008, a decrease of $1,245,000 or 4%. The decrease in net interest income was primarily due to the decline in interest rates during 2009 and the volume of assets and liabilities affected by the decline in rates. As the Corporation has interest sensitive assets of $1,005,918,000 and $975,337,000 for the years ended December 31, 2009 and 2008, respectively and interest bearing liabilities of $$887,010,000 and $834,731,000 for the years ended December 31, 2009 and 2008, respectively, the decline in interest rates causes a decrease in net interest income. The Corporation’s net interest rate spread decreased to 2.77% in 2009 from 2.80% in 2008, a decrease of 3 basis points. The Corporation’s net interest margin also decreased to 3.07% in 2009 from 3.29% in 2008, a decrease of 22 basis points. The decrease in the net interest rate spread was due to the decline in interest rates on the Corporation’s interest-bearing assets and interest-bearing liabilities and the increase in non-performing assets.

Average interest earning assets grew by $30.6 million between the periods while interest bearing liabilities grew by $52.3 million. Interest bearing liabilities were grown during the latter half of 2009 in order to improve the liquidity position of the Corporation. Management expects to increase time deposits as a percentage of deposits.

2008 Compared to 2007.Net interest income in 2008 was $32,131,000 compared to $33,619,000 in 2007, a decrease of $1,488,000 or 4%. The decrease in net interest income was primarily due to the decline in interest rates during 2008 and the volume of assets and liabilities affected by the decline in rates. As the Corporation has interest sensitive assets and liabilities of $975,337,000 and $834,731,000 for the years ended December 31, 2008 and 2007, respectively, the decline in interest rates causes a decrease in net interest income. The Corporation’s net interest rate spread increased to 2.80% in 2008 from 2.73% in 2007, an increase of 7 basis points. However, the Corporation’s net interest margin decreased to 3.29% in 2008 from 3.48% in 2007, a decrease of 19 basis points. The increase in the net interest rate spread was due to the decline in interest rates on the Corporation’s interest-bearing assets and interest-bearing liabilities.

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.

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 net loan category.


	Year Ended December 31, 2009							Year Ended December 31, 2008
	Average				Average			Average				Average
(In thousands)	Balance		Interest		Rate			Balance		Interest		Rate

Assets
Interest-bearing deposits with banks	$	73,057	$	374		0.51	%	$	6,591	$	43		0.65	%
Federal funds sold		5,873		17		0.29	%		8,316		86		1.04	%
Securities, available for sale		40,245		589		1.46	%		15,681		464		2.97	%
Loans		886,743		53,273		6.01	%		944,749		60,533		6.42	%

Sub-total earning assets		1,005,918		54,253		5.39	%		975,337		61,126		6.27	%
Other assets		51,333							81,377


Total assets	$	1,057,251						$	1,056,714


Liabilities and stockholders’ equity
Interest bearing deposits	$	809,905	$	20,993		2.59	%	$	740,520	$	25,106		3.40	%
Other borrowings		77,105		2,374		3.08	%		94,211		3,889		4.13	%

Sub-total interest bearing liabilities		887,010		23,367		2.63	%		834,731		28,995		3.47	%
Non-interest bearing deposits		82,915							83,065
Other liabilities		2,157							3,152
Stockholders’ equity		85,169							135,766


Total liabilities and stockholders’ equity	$	1,057,251						$	1,056,714


Net interest income			$	30,886						$	32,131


Net interest rate spread						2.77	%						2.80	%


Net interest margin on earning assets						3.07	%						3.29	%

(continued)


	Year Ended December 31, 2007
	Average				Average
(In thousands)	Balance		Interest		Rate

Assets
Interest-bearing deposits with banks	$	2,795	$	127		4.54	%
Federal funds sold		7,964		433		5.44	%
Securities, available for sale		10,772		603		5.60	%
Loans		944,225		68,947		7.30	%

Sub-total earning assets		965,756		70,110		7.26	%
Other assets		83,691


Total assets	$	1,049,447


Liabilities and stockholders’ equity
Interest bearing deposits	$	749,894	$	33,303		4.44	%
Other borrowings		56,526		3,188		5.64	%

Sub-total interest bearing liabilities		806,420		36,491		4.53	%
Non-interest bearing deposits		95,036
Other liabilities		4,736
Stockholders’ equity		143,255


Total liabilities and stockholders’ equity	$	1,049,447


Net interest income			$	33,619


Net interest rate spread						2.73	%


Net interest margin on earning assets						3.48	%

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.


				2009/2008									2008/2007
	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	$	340			($9	)	$	331		$	25			($109	)		($84	)
Federal funds sold		(7	)		(62	)		(69	)		3			(350	)		(347	)
Investment securities, available for sale		361			(236	)		125			144			(283	)		(139	)
Loans		(3,319	)		(3,941	)		(7,260	)		(132	)		(8,282	)		(8,414	)

Total earning assets		($2,625	)		($4,248	)		($6,873	)	$	40			($9,024	)		($8,984	)


Liabilities
Interest bearing deposits	$	1,867			($5,980	)		($4,113	)		($387	)		($7,810	)		($8,197	)
Other borrowings		(527	)		(988	)		(1,515	)		1,556			(855	)		701

Total interest bearing liabilities	$	1,340			($6,968	)		($5,628	)	$	1,169			($8,665	)		($7,496	)


Net interest income								($1,245	)								($1,488	)


Net interest rate spread								(0.03	%)								0.07	%


Net interest margin on earning assets								(0.22	%)								(0.19	%)

Provision for Loan Losses

2009 Compared to 2008.The provision for loan losses was $50,863,000 in 2009, compared to $14,606,000 in 2008, an increase of $36,257,000 or 248%. The increase in provision during 2009 was due primarily to the increase in non-accrual loans and net charge-offs during the period as a result of the downturn in economic activity that rapidly accelerated in early 2009. During 2009, our local markets were significantly impacted by the unprecedented bankruptcy filings of two major automobile manufacturers during the second quarter of 2009. While the Corporation had no direct exposure to these entities, these bankruptcy filings, subsequent shutdown of production for several months and the resulting employee layoffs has had a devastating impact on the general economic conditions in Southeastern Michigan during 2009. This downturn in economic activity has continued to worsen the condition of the residential real estate market during 2009 as well as to significantly impact the Bank’s commercial and commercial real estate mortgage portfolios. This downturn has also led to a significant decline in collateral values of all types of real property. Non-accrual loans declined to $49,341,000 at December 31, 2009 from $51,708,000 at December 31, 2008. The charge-off policy utilized by the Bank was also revised due to updated regulatory guidance. The Bank is required to record charge-offs on any substandard collateral dependent loan to reduce the loan balance to its fair value. Previously, the Bank would include any collateral shortfall on substandard collateral dependent loans in the allowance for loan losses. During 2009, the Bank recorded net charge-offs of $30,190,000 compared to $10,771,000 during 2008. At the time of origination, these land development loans were well-collateralized loans with well-established real estate developers and home builders. However, the underlying value of our collateral related to these types of loans has declined as the demand for new residential construction in Southeastern Michigan has diminished dramatically.

The fair value of loans specifically reviewed by management and determined to be impaired increased to $90,135,000 at December 31, 2009 from $41,907,000 at December 31, 2008. The allocated allowance of loans specifically reviewed by management and determined to be impaired increased to $8,297,000 at December 31, 2009 from $5,273,000 at December 31, 2008. Decreases in the fair value of impaired loans are reflected in the provision for loan loss and are primarily due to declines in the value of the underlying collateral.

The provision for loan losses is based upon management’s assessment of relevant factors, including types and amounts of non-performing loans, historical loss experience on such types of loans, the relevant change in the size and mix of the loan portfolio and the impact of current economic conditions on borrowers’ ability to repay their loans.

2008 Compared to 2007.The provision for loan losses was $14,606,000 in 2008, compared to $5,821,000 in 2007, an increase of $8,785,000 or 151%. The increase in provision during 2008 was due primarily to the increase in non-accrual loans and net charge-offs during the period as a result of the downturn in economic activity that began in 2007 and has continued into 2008. This downturn in economic activity has continued to worsen the condition of the residential real estate market during 2008 as well as to significantly impact the Bank’s commercial and commercial real estate mortgage portfolios. Non-accrual loans increased to $51,708,000 at December 31, 2008 from $18,117,000 at December 31, 2007. During 2008, the Bank recorded net charge-offs of $10,771,000 compared to $4,683,000 during 2007. The poor economic conditions in Southeastern Michigan that began in 2007 and have intensified during 2008 have significantly impacted our commercial, commercial real estate mortgage and land development portfolios. At the time of origination, these land development loans were well-collateralized loans with well-established real estate developers and home builders. However, the underlying value of our collateral related to these types of loans has declined as the demand for new residential construction in Southeastern Michigan has diminished dramatically.

Non-Interest Income

2009 Compared to 2008.Non-interest income was ($469,000) in 2009, compared to ($930,000) in 2008, an increase of $461,000 or 50%. The increase was primarily due to the increase in the gain on the sale of loans, increased rental income on other real estate and a decline in the losses recognized on the sale of other real estate write-down and loss on sale of real estate owned. During 2009, the Corporation recorded write-downs on 44 properties in the amount of $2,766,000. The Corporation recorded a net loss of $139,000 on the sale of 22 properties during 2009.

2008 Compared to 2007. Non-interest income was ($930,000) in 2008, compared to $1,020,000 in 2007, a decrease of $1,950,000 or 191%. The increase was primarily due to the increase in the write-down and loss on sale of real estate owned. During 2008, the Corporation recorded write-downs on eleven properties in the amount of $2,292,000. The Corporation recorded a net loss of $745,000 on the sale of fifteen properties during 2008. Service charges and other fees to customers were $1,760,000 in 2008 compared to $1,408,000 in 2007, an increase of $352,000 or 25%.

Non-Interest Expense

2009 Compared to 2008. Non-interest expense was $32,720,000 in 2009 compared to $65,007,000 in 2008 a decrease of $32,287,000 or 50%. The decrease in non-interest expense was primarily due to the impairment of goodwill and other intangible assets in 2008, partially offset by the impairment of intangible assets in 2009. This non-cash expense was due to the evaluation of the Bank’s intangible assets as of September 30, 2009. This valuation determined that the Bank’s intangible assets were entirely impaired.

When the non-cash impairment charges are excluded from 2009 and 2008, non-interest expense was $28,723,000 compared to $25,406,000 in 2008, an increase of $3,317,000 or 13%. This increase during 2009 is primarily due to the increase in defaulted loan expense, which is primarily comprised of real estate taxes, legal expense, insurance expense and maintenance expense related to real estate owned and non-performing loans and the increase in the FDIC assessment. Defaulted loan expense for 2009 was $4,624,000 compared to $2,078,000 during 2008, an increase of $2,546,000 or 123%. The FDIC assessment for 2009 was $2,843,000 compared to $696,000 during 2008, an increase of $2,147,000 or 308%.

The largest component of the decrease in non-interest expense was salaries and employee benefits which amounted to $12,974,000 in 2009 compared to $13,142,000 in 2008, a decrease of $168,000 or 1%. As of December 31, 2009, the number of full time equivalent employees was 194 compared to 205 as of December 31, 2008.

2008 Compared to 2007. Non-interest expense was $65,007,000 in 2008 compared to $23,796,000 in 2007, an increase of $41,211,000 or 173%. The increase in non-interest expense was primarily due to the impairment of goodwill and other intangible assets. This non-cash expense was due to the evaluation of the Bank’s goodwill and intangible assets as of December 31, 2008. This valuation determined that the Bank’s goodwill and intangible assets were impaired by $34,028,000 and $5,573,000, respectively.

When the non-cash impairment charge is excluded, non-interest expense was $25,406,000 compared to $23,796,000 in 2007, an increase of $1,610,000 or 7%. This increase during 2008 is primarily due to the increase in defaulted loan expense, which is primarily comprised of real estate taxes, legal expense, insurance expense and maintenance expense related to real estate owned and non-performing loans. Defaulted loan expense for 2008 was $2,078,000 compared to $685,000 during 2007, an increase of $1,393,000 or 204%.

Income Tax Provision

2009 Compared to 2008. Income tax expense (benefit) was $8,009,000 in 2009 compared to ($16,847,000) in 2008, an increase of $24,856,000. The increase was primarily due to the recording of a valuation allowance on the Corporation’s deferred tax asset in the amount of $25,851,000. As noted in the discussion of the provision for loan losses, two major automobile manufacturers filed for bankruptcy during 2009. The negative impact of these filings led to a significant increase in non-performing assets and subsequent losses recognized on these assets. These losses led management to evaluate the ability to utilize the deferred tax asset in a reasonable period. Management determined that utilizing the deferred tax asset was not verifiable and accordingly has fully reserved this asset. This non-cash charge eliminates the Corporation’s deferred tax asset in its entirety. Until this valuation allowance is retired, the Corporation will not record income tax expense or benefit. Refer to Note L of the Notes to Consolidated Financial Statements for additional information.

2008 Compared to 2007. Income tax expense (benefit) was ($16,487,000) in 2008 compared to $1,856,000 in 2007, a decrease of $18,343,000. The decrease was primarily due to the decrease in income before federal income tax. Refer to Note K of the Notes to Consolidated Financial Statements for additional information.

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

Assets.Total assets at December 31, 2009 were $986,486,000 compared to $1,121,918,000 at December 31, 2008, a decrease of $135,432,000 or 12%. The decrease was primarily due to a decrease in net loans, securities available for sale, other assets, partially offset by an increase in other real estate and cash and cash equivalents. The decrease in other assets was primarily due to the recording of a valuation allowance on the Corporation’s deferred tax asset.

Securities Available for Sale.Total securities available for sale, at December 31, 2009 were $45,964,000 compared to $84,148,000 at December 31, 2008, a decrease of $38,184,000 or 45%. The decrease was primarily due to the sale of a short-term investment. The Bank’s portfolio of securities available for sale has an amortized cost and a fair value of $46.0 million. The securities at December 31, 2009 are as follows (in thousands):


	December 31, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

US Government sponsored agency securities	$	12,759	$	20		($30	)	$	12,749
Corporate bonds		33,308		—		(197	)		33,111
Mortgage backed securities		101		3		—			104


Totals	$	46,168	$	23		($227	)	$	45,964

A balance and yield schedule of the securities portfolio at December 31, 2009 is listed below (in thousands):


					Estimated		Weighted
			Amortized		Market		Average
	Par Value		Cost		Value		Yield

US Government sponsored agency securities	$	12,500	$	12,759	$	12,749		1.25	%
Corporate bonds		33,000		33,308		33,111		1.19	%
Mortgage backed securities		101		101		104		5.95	%


Totals	$	45,601	$	46,168	$	45,964		1.22	%

The entire available for sale portfolio matures in 1 to 5 years. The entire portfolio has a net unrealized loss of $204,000. The unrealized gain is reflected by an adjustment to stockholders’ equity. The Corporation does not hold or utilize derivatives.

Loans.Total loans at December 31, 2009 were $833,136,000 compared to $933,269,000 at December 31, 2008, a decrease of $100,133,000 or 11%. The components of the outstanding balances for the years ended December 31, are as follows (in thousands):


	2009		2008		2007		2006		2005

Consumer loans	$	29,386	$	31,864	$	35,833	$	32,282	$	35,041
Commercial, financial, & other		144,630		164,740		174,958		124,523		106,900
Land development loans — residential		38,472		54,323		63,639		65,460		58,943
Land development loans — non residential		11,644		16,094		10,156		14,633		0
Commercial construction loans — residential		13,287		17,296		33,768		30,988		37,806
Commercial construction loans — non residential		20,061		25,322		40,187		38,662		47,384
Commercial real estate mortgages		531,156		571,204		539,306		401,924		323,666
Residential real estate mortgages		44,500		52,426		54,237		47,948		47,297


	$	833,136	$	933,269	$	952,084	$	756,420	$	657,037

The decrease in loans during 2009 was primarily due to net charge-offs of $30,190,000, the transfer of loans to other real estate in the amount of $21,547,000 and normal loan amortization.

The Bank expects all types of commercial loans to decline during 2010, as management continues to focus on management of the existing loan portfolio and decreasing the level of non-performing loans in the portfolio. The Bank’s portfolio of consumer and residential loans will remain relatively stable as the repayment streams of these types of loans will be replaced by the active origination of these types of loans.

A maturity and repricing schedule of the loan portfolio, which distributes fixed rate loans by maturity date and adjustable rate loans by repricing date at December 31, 2009 is listed below (in thousands):


	Within		Three to		One to		After
	Three		Twelve		Five		Five
	Months		Months		Years		Years		Total

Consumer loans	$	19,695	$	573	$	7,843	$	36	$	28,147
Commercial, financial & other		60,748		12,067		59,696		3,031		135,542
Land development loans — residential		23,409		1,848		3,280		—		28,537
Land development loans - non-residential		6,861		—		1,791		—		8,652
Construction loans — residential		5,507		1,856		—		—		7,363
Construction loans — non-residential		15,224		228		1,050		—		16,502
Commercial real estate mortgages		35,438		55,275		404,312		21,550		516,575
Residential real estate mortgages		2,282		17,321		14,599		8,275		42,477


	$	169,164	$	89,168	$	492,571	$	32,892		783,795


Non-accrual loans										49,341

Total loans									$	833,136


Loan at fixed interest rates	$	58,645	$	72,853	$	474,850	$	32,410	$	638,758
Loan at variable interest rates		110,519		16,315		17,721		482		145,037


	$	169,164	$	89,168	$	492,571	$	32,892		783,795


Non-accrual loans										49,341

Total loans									$	833,136

Variable rate loans comprise 19% of the loan portfolio. The interest rates of these loans change or reprice at specific intervals according to certain market indices. The remainder of the loan portfolio has a fixed interest rate until maturity.

The Bank automatically places any loan that has been partially charged-off and most consumer loan borrowers in bankruptcy proceedings on non-accrual. The Bank on a discretionary basis places loans on non-accrual when a borrower is in bankruptcy where adequate security cannot be demonstrated and the borrower ceases paying interest. All other loans are typically placed on non-accrual after the borrower is ninety days or more past due unless collection is expected within 60 days. Refer to Note C of the Notes to the Consolidated Financial Statements for additional information.

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


	2009		2008

Troubled debt restructuring and still accruing		59,420		17,765
Over 90 days past due and still accruing		—		450
Non-accrual loans		49,341		51,708

Total non performing loans	$	108,761	$	69,923

Non-performing loans included troubled debt restructuring of $59,420,000 at December 31, 2009. These loans were qualified as troubled debt restructuring due to changes from principal and interest payments to interest only payments, restructuring of collateral, or renewals of interest reserves when current loan to value ratios were outside of our normal loan policy. Accordingly, these loans are deemed impaired upon restructuring. Any necessary valuation allowance is set aside for these loans in the allowance for loan losses. At December 31, 2009, specific allocations for loans classified as troubled debt restructuring amount to $5,452,000. At December 31, 2009, 3 loans classified as troubled debt restructuring amounting to $2,705,000 were not performing according to their restructured terms.

Non-accrual loans at December 31, 2009 were $49,341,000. The increase in non-accrual loans during the year ended December 31, 2009 is primarily due to the downgrading of 101 loans with a balance of $34,695,000 to non-accrual status. An impairment analysis was completed on these loans and any loans with a collateral shortfall were charged down to the fair value of the collateral less estimated selling costs. The fair value of the collateral is determined primarily through the utilization of prior appraisals, which are discounted according to age of the appraisal and the utilization of supplemental current market information. Charge-offs in the amount of $30,190,000 were recorded on these loans by the Corporation during 2009. We continue to work to collect these loans as they are all secured by real estate which we believe will have significant value, even in liquidation. The distribution of loans downgraded to non-accrual status during 2009 (dollars, in thousands) is as follows:


	Number of
	Loans		Balance
Consumer Loans		12	$	787
Commercial Loans		31		8,375
Land Development — Residential		10		5,740
Land Development — Non Residential		2		1,548
Commercial Construction Loans — Residential		9		3,230
Commercial Construction Loans — Non Residential		3		3,559
Commercial Mortgage Loans		25		9,672
Residential Mortgages Loans		9		1,784


Totals		101	$	34,695

The increase in non-performing loans is primarily related to the Bank’s commercial and commercial real estate loans as well as loans financing the development and construction of residential property. The decline of general economic conditions in Southeastern Michigan which intensified during 2009 has negatively impacted many or the Bank’s commercial borrowers. The collapse of the value of the residential real estate market in Southeastern Michigan has negatively impacted the underlying collateral value of our portfolio of land development and construction loans. At the time of origination, these loans were well-collateralized loans with well-established real estate developers and home builders. However, the underlying value of our collateral related to these types of loans has declined as the demand for new residential construction in Southeastern Michigan has diminished dramatically and the adverse impact on our loan portfolio is expected to continue. The distribution of non-accrual loans by loan type (dollars, in thousands) is as follows at December 31, 2009:


	Number of
	Loans		Balance
Consumer loans		17	$	1,239
Commercial, financial, & other		40		9,088
Commercial real estate construction — residential property		14		9,935
Commercial real estate construction — non residential property		3		2,992
Land development loans — residential property		13		5,924
Land development loans — non residential property		3		3,559
Commercial real estate mortgages		38		14,581
Residential real estate mortgages		11		2,023


Total non-accrual loans		139	$	49,341

Allowance for Loan Losses.The allowance for loan losses at December 31, 2009 was $35,125,000 compared to $14,452,000 at December 31, 2008, an increase of $20,673,000 or 143%. The large increase in provision for loan losses during 2009 was primarily the result of net charge-offs and the increase in problem loans during the year. Net charge-offs amounted to $30,190,000 during 2009. These charge-offs are primarily related to the Bank’s commercial and commercial real estate loans as well as loans financing the development and construction of residential property. The decline of general economic conditions in Southeastern Michigan as previously discussed has negatively impacted many of the Bank’s commercial borrowers. The collapse of the value of the residential real estate market in Southeastern Michigan has negatively impacted the underlying collateral value of our portfolio of land development and construction loans. This downturn in the residential real estate market is expected to continue and management expects the decline in the market value of our collateral to continue. The allowance for loan losses was based upon management’s assessment of relevant factors, including specific borrower situations and estimated collateral values, loan growth, types and amounts of non-performing loans, historical and anticipated loss experience on such types of loans, and current economic conditions. Transactions in the allowance for loan losses for the years ended December 31, are as follows (in thousands):


	2009			2008			2007			2006			2005

Balance, beginning of year	$	14,452		$	10,617		$	7,775		$	6,808		$	5,884

Allowance on loans acquired		—			—			1,704			—			—

Charge-offs:
Consumer loans		1,154			318			226			24			112
Commercial, financial & other		4,878			4,304			914			139			169
Commercial construction loans — residential		9,441			1,635			1,291			—			—
Commercial construction loans — non-residential		4,364			192			0			—			—
Land development loans — residential		1,471			1,777			1,665			—			—
Land development loans — non-residential		1,981			0			0			0			0
Commercial real estate mortgages		6,919			2,446			662			36			86
Residential loans		701			296			320			38			—

Recoveries:
Consumer loans		176			19			25			17			37
Commercial, financial & other		339			117			224			218			131
Commercial construction loans — non-residential		0			3			6			—			—
Land development loans — residential		107			33			—			—			—
Commercial real estate mortgages		61			21			140			26			10
Residential loans		36			4			—			—			32


Net charge-offs		30,190			10,771			4,683			(24	)		157

Additions charged to operations		50,863			14,606			5,821			943			1,081


Balance at end of period	$	35,125		$	14,452		$	10,617		$	7,775		$	6,808


Allowance to total loans		4.22	%		1.55	%		1.12	%		1.03	%		1.04	%


Net Charge-offs to average loans		3.41	%		1.14	%		0.50	%		0.00	%		0.02	%

The increase in the allowance for loan losses was based upon management’s assessment of relevant factors, including types and amounts of non-performing loans, historical loss experience for the Bank and for other banks in the peer group on such types of loans, the relevant change in the size and mix of the Bank’s loan portfolio and expected impact of current economic conditions on borrowers’ ability to repay their loans.

Management made significant enhancements to its methodology for analyzing its allowance for loan losses during 2009. These enhancements were made in order to more accurately identify the risk factors and their impact on the Bank’s loan portfolio. These enhancements to our analysis include:

	•		The period utilized for the consideration of net charge-offs was shortened from two years to one year based on the nature of the economic environment in Southeastern Michigan.

	•		The charge-off policy utilized by the Bank was also revised due to updated regulatory guidance. The Bank is required to record charge-offs on any substandard collateral dependent loan to reduce the loan balance to its fair value. Previously, the Bank would include any collateral shortfall on substandard collateral dependent loans in the allowance for loan losses.

	•		The loans that were individually analyzed for impairment was changed during 2009 to include any loans over $500,000 that were on non-accrual status and any loans that were classified as troubled debt restructuring. Previously, all substandard loans greater that $150,000 were individually analyzed for impairment and loans classified as troubled debt restructuring were not individually analyzed.

	•		The loss factors applied to those loans not individually analyzed was modified to more accurately include the risk of charge-off by loan type.

Management believes that these enhancements in its methodology of analyzing its allowance for loan losses will identify the risk inherent in its loan portfolio more effectively.

The allocation of the allowance for loan losses as of December 31, 2009 is as follows (in thousands):


	Total
	2009		2008		2007		2006		2005

Consumer loans	$	819	$	141	$	453	$	470	$	512
Commercial, financial, & other		6,498		1,298		1,404		1,462		1,527
Land development loans — residential		5,909		4,496		2,215		1,228		566
Land development loans — non-residential		807		2,086		117		146		0
Commercial construction loans — residential		2,003		1,739		714		366		311
Commercial construction loans — non-residential		3,450		1,151		553		434		517
Commercial real estate mortgages		15,286		3,391		4,671		3,270		3,065
Residential real estate mortgages		353		150		490		398		310

	$	35,125	$	14,452	$	10,617	$	7,775	$	6,808


	Percent of allowance for loan losses in each category
	to total allowance for loan losses
	2009			2008			2007			2006			2005

Consumer loans		2.33	%		0.98	%		4.27	%		6.05	%		7.52	%
Commercial, financial, & other		18.50	%		8.98	%		13.22	%		18.80	%		22.43	%
Land development loans — residential		16.82	%		31.11	%		20.86	%		15.80	%		8.31	%
Land development loans — non-residential		2.30	%		14.43	%		1.10	%		1.88	%		0.00	%
Commercial construction loans — residential		5.70	%		12.03	%		6.73	%		4.71	%		4.57	%
Commercial construction loans — non-residential		9.82	%		7.96	%		5.21	%		5.58	%		7.59	%
Commercial real estate mortgages		43.52	%		23.46	%		44.00	%		42.06	%		45.02	%
Residential real estate mortgages		1.01	%		1.04	%		4.62	%		5.12	%		4.55	%

		100.00	%		100.00	%		100.00	%		100.00	%		100.00	%


	Percent of loans in each category to total loans
	2009			2008			2007			2006			2005

Consumer loans		3.53	%		3.41	%		3.76	%		4.27	%		5.33	%
Commercial, financial, & other		17.36	%		17.65	%		18.38	%		16.46	%		16.27	%
Land development loans — residential		4.62	%		5.82	%		6.68	%		8.65	%		8.97	%
Land development loans — non-residential		1.40	%		1.72	%		1.07	%		1.93	%		0.00	%
Commercial construction loans — residential		1.59	%		1.85	%		3.55	%		4.10	%		5.75	%
Commercial construction loans — non-residential		2.42	%		2.71	%		4.22	%		5.11	%		7.21	%
Commercial real estate mortgages		63.75	%		61.20	%		56.64	%		53.14	%		49.26	%
Residential real estate mortgages		5.34	%		5.62	%		5.70	%		6.34	%		7.20	%

		100.00	%		100.00	%		100.00	%		100.00	%		100.00	%

Premises and Equipment.Premises and equipment at December 31, 2009 were $20,194,000 compared to $21,272,000 at December 31, 2008, a decrease of $1,078,000 or 5%. The decrease was primarily due to the depreciation of the Bank’s fixed assets.

Real Estate Owned.Real estate owned at December 31, 2009 was $23,435,000, compared to $9,657,000 at December 31, 2008, an increase of $13,778,000 or 143%. Prior to being transferred to real estate owned, a valuation of the collateral is completed. Depending on the scope of the collateral, new appraisals may be performed as part of this process. If a new appraisal is not deemed to be necessary, valuations are completed internally by lending professionals based on prior appraisals and other current market information. Prior appraisals are discounted based on the age of the appraisal. All valuations are subsequently reviewed by management. The book value is determined by deducting the estimated selling costs from the valuation. Any charge-offs are recorded prior to the transfer to real estate owned. The fair value of these properties is reviewed based on changing market conditions and subsequent valuations are obtained at least annually. Real estate owned at December 31, 2009 is comprised of 72 properties with an aggregate appraised value of $28,001,000. The Bank expects real estate owned to increase during 2010 as non-performing loans are transferred to other real estate. During 2009, the Corporation recorded loss on the sale of real estate of $139,000 and write-downs in the value of real estate in the amount of $2,766,000 to address the decline in property values after the Bank took ownership of real estate.

Goodwill and Other Intangible Assets.Goodwill and other intangible assets were $0 at December 31, 2009, compared to $4,592,000 at December 31, 2008. The decrease was due to the impairment other intangible assets. The Bank had intangible assets for the estimated value of core deposit accounts and borrower relationships acquired in the acquisition of Fidelity Bank and the Bank of Washtenaw. Both of these acquisitions were consolidated into the Bank along with the goodwill and other intangible assets. The intangible values represent the present value of the net revenue streams attributable to these intangibles.

These intangible assets were analyzed and re-valued at September 30, 2009. The analysis indicated that these intangibles assets had no remaining value. The impairment to the core deposit intangibles was primarily due to the erosion of core deposits at a faster rate than anticipated. The impairment of the customer relationship intangible is primarily due to the migration of loans at a more rapid rate than expected and the impact of current economic conditions on the loan portfolio. The Bank recorded amortization expense for intangible assets of $595,000 and impairment expense for intangible assets of $3,997,000 during the year ended December 31, 2009. The components of amortization expense of intangible assets and impairment expense of intangible assets for the year ended December 31, 2009 were as follows (in thousands):


	2009
	Amortization of		Impairment of
	Intangible Assets		Intangible Assets
Core deposit intangible from acquisition of:
Bank of Washtenaw	$	33	$	231
Fidelity Financial Corporation of Michigan		312		2,181

Total core deposit intangible	$	345	$	2,412

Borrower relationship intangible from acquisition of:
Bank of Washtenaw	$	43	$	275
Fidelity Financial Corporation of Michigan		207		1,310

Total borrower relationship intangible	$	250	$	1,585

Total intangible assets	$	595	$	3,997

Accrued Interest Receivable.Accrued interest receivable at December 31, 2009 was $3,562,000 compared to $3,499,000 at December 31, 2008, an increase of $63,000 or 2%. The increase was primarily due to the decline in loans during 2009.

Other Assets. Other assets at December 31, 2009 were $12,660,000 compared to $21,483,000 at December 31, 2008, a decrease of $8,823,000 or 41%. The decrease was largely due to the recording of a valuation allowance on the Corporation’s deferred tax asset, partially offset by the recording of a federal income tax receivable.

Deposits.Total deposits at December 31, 2009 were $867,955,000 compared to $938,395,000 at December 31, 2008, a decrease of $70,440,000 or 8%. The components of the outstanding balances and percentage increase in deposits from 2008 to 2009 are as follows (in thousands):


	December 31, 2009					December 31, 2008					Percent
	Balance		Percent			Balance		Percent			Increase/(Decrease)

Non-interest bearing:
Demand	$	83,873		9.66	%	$	81,317		8.67	%		3.14	%


Interest bearing:
Checking	$	83,087		9.57	%	$	103,774		11.06	%		(19.93	%)
Money market		52,412		6.04	%		163,611		17.44	%		(67.97	%)
Savings		43,343		4.99	%		54,164		5.77	%		(19.98	%)
Time, under $100,000		301,829		34.77	%		211,109		22.50	%		42.97	%
Time, $100,000 and over		303,411		34.97	%		324,420		34.56	%		(6.48	%)

		784,082		90.34	%		857,078		91.33	%		(8.52	%)


	$	867,955		100.00	%	$	938,395		100.00	%		(7.51	%)

The decrease in deposits was primarily due to the liquidation of the Deutche Bank Money Market program which was initiated by management and the decrease in wholesale deposits. These decreases were partially offset by the increase in time deposits. The Bank completed an annual customer appreciation promotion in April 2009. Management developed this campaign to increase liquidity and name awareness.

The Bank’s primary source of funds are retail deposits. The Bank is currently limited in the interest rates that may be offered on deposit account. The interest rates that the Bank offers on deposit products cannot exceed the interest rate caps that are published by the FDIC on a weekly basis. Additionally, the Bank is limited in the utilization of brokered deposits.

The Bank also utilizes public funds in the form of time deposits, $100,000 and over and brokered deposits as secondary sources of funds. In order to coordinate and manage these efforts, the Bank has also designated a public funds officer. Public funds at December 31, 2009 were $4.5 million compared to $44.2 million at December 31, 2008. There were 23 and 33 entities with public funds on deposit at December 31, 2009 and 2008, respectively. The average term of time deposits invested with the Bank by public units was 240 and 129 days at December 31, 2009 and 2008, respectively. Brokered deposits were $17.5 million with an average rate of 1.05% at December 31, 2009, compared to $91.7 million with an average rate of 3.48% at December 31, 2008.

Final maturities of total time deposits are as follows (in thousands):


	$100,000 and over		Less than $100,000		Total

2010	$	277,729	$	274,181	$	551,910
2011		24,367		26,534		50,901
2012		802		587		1,389
2013		—		187		187
2014 and thereafter		513		340		853


Totals	$	303,411	$	301,829	$	605,240

The following is a summary of the distribution and weighted average interest rate of deposits at December 31, 2009 and 2008 (in thousands):


	2009					2008
			Weighted					Weighted
			Average					Average
	Amount		Rate			Amount		Rate

Non-interest bearing:
Demand	$	83,873		—		$	81,317		—


Interest bearing:
Checking	$	83,087		0.47	%	$	103,774		1.75	%
Money market		52,412		0.64	%		163,611		2.19	%
Savings		43,343		0.30	%		54,164		2.06	%
Time, under $100,000		301,829		2.71	%		211,109		3.81	%
Time, $100,000 and over		303,411		2.59	%		324,420		3.64	%

		784,082					857,078


	$	867,955				$	938,395

The Bank continues a strategy of shifting maturing time deposits into other savings products.

Federal Home Loan Bank Advances. Federal Home Loan Bank advances at December 31, 2009 were $63,855,000 compared to $65,019,000 at December 31, 2008, an decrease of $1,164,000 or 2%. Management expects the amount of advances to remain relatively unchanged during 2010

In 1999, the Bank joined the Federal Home Loan Bank of Indianapolis. Membership in the Federal Home Loan Bank provides the Bank with a stable source of additional funding at a reasonable cost. Federal Home Loan Bank advances are collateralized with a blanket collateral agreement with the Federal Home Loan Bank and investment securities, available for sale. Please refer to Note I of the Notes to the Consolidated Financial Statements for additional information.

Other Borrowings.Other borrowings were $0 at December 31, 2009 compared to $2,461,000 at December 31, 2008, a decrease of $2,461,000. These borrowings were comprised of several repurchase agreements that are secured by securities held by the Bank. These agreements have been terminated.

Accrued Interest Payable. Accrued interest payable at December 31, 2009 was $1,046,000 compared to $1,695,000 at December 31, 2008, a decrease of $649,000 or 38%. The decrease was primarily due to the decline in interest rates paid on deposits.

Other Liabilities.Other liabilities were $1,685,000 at December 31, 2009 compared to $1,037,000 at December 31, 2008, an increase of $648,000 or 62%. The increase was primarily due to an increase in accrued expenses.

Subordinated Debentures.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. Please refer to Note J of the Notes to the Consolidated Financial Statements for additional information.

Capital

Stockholders’ equity at December 31, 2009 was $41,945,000 compared to $103,311,000 as of December 31, 2008, a decrease of $61,366,000 or 59%. The decrease was primarily due to the net loss during 2009.

Applicable federal prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At December 31, 2009, the Bank and Corporation were undercapitalized. At December 31, 2008, the Bank and Corporation exceeded all applicable regulatory capital requirements as described in Note O of the Notes to the Consolidated Financial Statements.

Undercapitalized institutions are subject to close monitoring by their federal bank regulator, restrictions on asset growth and expansion, and other significantly greater regulatory restrictions than apply to well-capitalized or adequately capitalized institutions.

Management is considering various sources of capital and is considering a variety of options to accomplish this requirement during 2010.

Market Risk Analysis

The Corporation’s primary market risk exposure is interest rate risk and, to a lesser degree, liquidity risk. All of our transactions are denominated in U. S. dollars with no specific foreign exchange exposure. The Corporation has no agricultural-related loan assets and therefore has no significant exposure to changes in commodity prices. Any impact that changes in foreign exchange rates or commodity prices would have on interest rates are assumed to be insignificant. Interest rate risk is the exposure of our financial condition to adverse movements in interest rates. We derive our income primarily from the excess of interest collected on our interest-earning assets over the interest paid on our interest-bearing liabilities. The rates of interest earned on the assets and owed on our liabilities of the Corporation generally are established contractually for a period of time. Since market interest rates change over time, we are exposed to lower profitability if we cannot adapt to interest rate changes. Accepting interest rate risk can be an important source of profitability and shareholder value; however, excessive levels of interest rate risk could pose a significant threat to our earnings and capital base. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to our safety and soundness.

Interest Rate Sensitivity Analysis.Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control interest rate risk and the quantitative level of exposure. The Corporation’s interest rate risk management process seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain interest rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest rate risk, we assess the existing and potential future effects of changes in interest rates on our financial position, including capital adequacy, earnings, liquidity and asset quality.

The Corporation primarily uses two interest rate risk measurement techniques. The first, which is commonly referred to as GAP analysis, measures the difference between the dollars amounts of interest-sensitive assets and liabilities that will be repriced or mature during a given time period. The Corporation has sought to manage its exposure to changes in interest rates by matching more closely 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 than 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.

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 expected and would tend to increase the negative gap position. Conversely, during a period of falling 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 December 31, 2009 which are expected to mature or reprice in each of the time periods shown below.


	Interest Rate Sensitivity Period
	1-90			91-365			1-5		Over
(In thousands)	Days			Days			Years		5 Years		Total
Earning assets
Federal funds sold	$	156		$	—		$	—	$	—	$	156
Interest bearing deposits with Banks		69,538			—			—		—		69,538
Mortgage loans held for sale		1,129			—			—		—		1,129
Securities available for sale		—			—			45,964		—		45,964
Federal Home Loan Bank stock		3,698			—			—		—		3,698
Total loans, net of non-accrual		169,163			88,745			492,995		32,892		783,795

Total earning assets		243,684			88,745			538,959		32,892		904,280

Interest bearing liabilities
Total interest bearing deposits		374,977			355,773			53,064		268		784,082
Federal Home Loan Bank advances		34,000			15,084			14,771		—		63,855
Other Borrowings		—			—			—		—		—
Subordinated debentures		10,000			—			—		—		10,000

Total interest bearing liabilities		418,977			370,857			67,835		268		857,937


Net asset (liability) funding gap		(175,293	)		(282,112	)		471,124		32,624	$	46,343


Cumulative net asset (liability) funding gap		($175,293	)		($457,405	)	$	13,719	$	46,343

The second interest rate measurement used is commonly referred to as net income simulation analysis. We believe that this methodology provides a more accurate measurement of interest rate risk than GAP analysis. The simulation model assesses the directions and magnitude of variations in net interest income resulting from potential changes in market interest rates. This model would normally display the impact of identical movements in either direction. However, the potential downward movement in the prime interest rate is limited due to the current level of of that interest rate. The maximum movement of that interest rate would be 100 basis points. Key assumptions in the model include prepayment speeds on various loan and investment assets; cash flows and maturities of interest-sensitive assets and liabilities; the variability of interest rate sensitivity of assets and liabilities; and changes in market conditions impacting loan and deposit volume and pricing. These assumption are inherently uncertain, subject to fluctuation and revision in a dynamic environment; therefore, the model cannot precisely estimate net interest income or exactly predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes, changes in market conditions and our strategies, among other factors.

We conducted an interest rate simulation as of December 31, 2009, that assumed a gradual change in market rates occurred over the following twelve months. The following table reflects the suggested impact on net interest income over the next twelve months (dollars, in thousands):


	Change in Net Interest Income
Interest Rate Change	Amount		Percent
+ 300 Basis Points	$	962		2.64	%
+ 200 Basis Points		714		1.96	%
+ 100 Basis Points		398		1.09	%
- 100 Basis Points		10		0.03	%

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.

The Corporation’s primary source of liquidity is its deposit base, raised through its retail branch system along with its unpledged securities, available for sale and overnight deposits with other banks. The Bank also has other wholesale sources of funds including brokered deposits, advances from the Federal Home Loan Bank of Indianapolis and borrowings from the Federal Reserve Bank.

Management evaluates the liquidity position of the Bank on a daily basis and makes appropriate decisions as to the utilizations of the Bank’s sources of funds and the deployment of excess cash. The Bank’s Deposit Pricing Committee is a sub-committee of the Bank’s Asset and Liability Committee and meets at least weekly. This Committee is comprised of the Chief Financial Officer, Controller, Head of Retail and Chief Deposit Officer. This Committee reviews the Bank’s available cash, available sources of funds, projected deposit maturity schedule and interest rates. This committee makes and enacts decisions regarding all aspects of the Bank’s deposits including the level of interest rates and was formed in order to react more quickly to the rapidly changing liquidity needs of the Bank. Regulatory interest rate restrictions are monitored weekly by the Chief Deposit Officer and any appropriate adjustments are implemented promptly.

Certain credit markets that the Corporation participated in previously and utilized as a primary source of funds became significantly disrupted and volatile during 2009 and are no longer relied upon by management. As a result, the Bank has increased its level of deposits and investment securities that can be pledged as collateral.

The following tables provide information about the Bank’s contractual obligations and commitments at December 31, 2009 (in thousands):

Contractual Obligations


	Payments Due By Period
	Less Than 1 Year		1-3 Years		3-5 Years		Over 5 Years		Total
Certificates of deposit	$	551,910	$	52,290	$	1,040	$	—	$	605,240
Long-term borrowings		49,139		4,716		10,000		—		63,855
Lease commitments		649		487		24		—		1,160
Subordinated debentures		—		—		—		10,000		10,000


Totals	$	601,698	$	57,493	$	11,064	$	10,000	$	680,255

Unused Loan Commitments and Letters of Credit


	Amount Of Commitment Expiration Per Period
	Less Than 1 Year		1-3 Years		3-5 Years		Over 5 Years		Total
Unused loan commitments	$	51,816	$	7,761	$	6,918	$	8,722	$	75,217
Standby letters of credit		770		1,932		—		—		2,702

Totals	$	52,586	$	9,693	$	6,918	$	8,722	$	77,919

Impact of Inflation and Changing Prices

The Consolidated Financial Statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation is reflected in the increased cost of the Corporation’s operations. Unlike most industrial companies, virtually all the assets and liabilities of the Corporation are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction, or to the same extent, as the prices of goods and services.

Technology

The Corporation, operating as an independent, local community bank, strives to make available to its employees and customers a high level of technology as a way to be competitive with other larger financial institutions.

The Bank has implemented the following technologies:

ATM Banking
In Touch Voice Response Telephone Banking
Netteller Internet Banking
Netteller Cash Management
Vertex Teller Automation
Teller Item Capture
Streamline Platform Automation
Netteller Bill Pay
Remote Deposit Capture
Check 21
Electronic Cash Letter Delivery
Electronic Statements Interactive
DirectLine OFX (Open Financial Exchange)
ATM/Debit Card On-Line Real Time Processing
Remote Deposit Lockbox Processing
Mutual Fund Sweeps
Netteller Positive Pay
Overdraft Protection
Yellow Hammer Fraud Protection

During 2010, the Bank plans to implement the following technologies:

Re-launch Website with an updated features and appearance

DEARBORN BANCORP, INC.

DIRECTORS AND OFFICERS

DIRECTORS

MARGARET I. CAMPBELL
Retired, Manufacturing

JOHN E. DEMMER
Chairman of the Board and
Chief Executive Officer
Jack Demmer Ford, Inc.;
Jack Demmer Lincoln-Mercury, Inc. and
Jack Demmer Leasing

WILLIAM J. DEMMER
President
Jack Demmer Ford, Inc and
Jack Demmer Lincoln-Mercury, Inc.

MICHAEL V. DORIAN, JR.
President
Mike Dorian Ford

DAVID HIMICK
Retired, Industrial Supply

DONALD G. KARCHER
Agent
Karcher Agency, Inc.

BRADLEY F. KELLER
Retired
Former President
Braden Associates, Inc. and
MultiGard Properties, Ltd.

JEFFREY G. LONGSTRETH
Real Estate Broker
Century 21 — Curran & Christie

MICHAEL J. ROSS
President and Chief Executive Officer
Fidelity Bank

DR. ROBERT C. SCHWYN
Physician
Oaklane Medical

OFFICERS

JOHN E. DEMMER
Chairman of the Board

MICHAEL J. ROSS
President and Chief Executive Officer

JEFFREY L. KARAFA
Vice President, Treasurer and Secretary

FIDELITY BANK

DIRECTORS AND EXECUTIVE OFFICERS

DIRECTORS

MARGARET I. CAMPBELL
Retired, Manufacturing

JOHN E. DEMMER
Chairman of the Board
Jack Demmer Ford, Inc.;
Jack Demmer Lincoln-Mercury, Inc. and
Jack Demmer Leasing

WILLIAM J. DEMMER
President
Jack Demmer Ford, Inc. and
Jack Demmer Lincoln-Mercury

MICHAEL V. DORIAN, JR.
President
Mike Dorian Ford

DAVID HIMICK
Retired, Industrial Supply

DONALD G. KARCHER
Agent
Karcher Agency, Inc.

BRADLEY F. KELLER
Retired
Former President
Braden Associates, Inc. and
MultiGard Properties, Ltd.

JEFFREY G. LONGSTRETH
Real Estate Broker
Century 21 — Curran & Christie

MICHAEL J. ROSS
President and Chief Executive Officer
Fidelity Bank

DR. ROBERT C. SCHWYN
Physician
Oaklane Medical

EXECUTIVE OFFICERS

MICHAEL J. ROSS
President
Chief Executive Officer

JEFFREY L. KARAFA
Senior Vice President
CFO & Secretary

WARREN R. MUSSON
Senior Vice President
Head of Lending

JEFFREY J. WOLBER
Senior Vice President
Head of Retail

OFFICERS

FIRST VICE PRESIDENT

TERRENCE R. O’NEIL
First Vice President — Credit

VICE PRESIDENTS

GARY W. AMES, JR.
Vice President & Controller

THOMAS E. BELL
Vice President — Commercial Loans

DANIEL P. BROPHY
Vice President — Commercial Loans

KATHERINE T. BROWN
Vice President — Commercial Loans

DANIEL A. BZURA
Vice President — Branch Operations

RITA L. CAVATAIO
Vice President — Commercial Loans

GEORGE J. DEMOU
Vice President — Commercial Loans

FRANK J. FILECCIA
Vice President — Business Development

CYNTHIA A. FRAGA
Vice President — Commercial Loans

LEE E. FREELAND
Vice President — Sales Administration

ROBERT F. GRANT
Vice President — Commercial Loans

JIHAD A. HACHEM
Vice President — Commercial Loans

ALLEN E. HEIMER
Vice President — Commercial Loans

F. GLEN ISLAMI
Vice President — Compliance

DEBRA S. LEONARD
Vice President — Product Delivery

DAVID W. LESLIE
Vice President — Commercial Loans

TERRENCE P. LEVINS
Vice President — Commercial Loans

WYNN C. MILLER
Vice President — Internal Audit

REGAN J. MORIN
Vice President — Commercial Loans

MARK M. PACITTO
Vice President — Commercial Loans

STEVEN M. PELTZ
Vice President — Commercial Loans

ELIZABETH A. PIZZO
Vice President — Human Resources

JAMES T. POWERS
Vice President — Product Support

DENNIS C. ROCHELEAU
Vice President & Cashier

GARY P. RUSCH
Vice President — Commercial Loans

GREGORY M. SCHNEIDER
Vice President — Commercial Loans

STEVEN P. SLADE
Vice President — Consumer Loans

DAVID S. SOBLE
Vice President — Commercial Loans

STEPHEN C. TARCZY
Vice President — Commercial Loans

RICHARD K. VALLEE
Vice President — BSA and Security

SUSAN VETTRAINO
Vice President — Internal Controls

BRADY J. VIBERT
Vice President — Commercial Loans

CHRISTOPHER E. WESTPHAL
Vice President — Commercial Loans

PAMELA G. WILKS
Vice President — Product Support

ASSISTANT VICE PRESIDENTS

DEBBY M. ASTERIOU

PATRICIA CARMONA

KAREN M. COVER

PATRICIA L. DANCIK

DONALD D. HARBIN

NADINE S. MCMILLAN

DAN K. MORRIS

MIHAI PARASCA

MARIAN Z. SMRCKA

FIRST LEVEL OFFICERS

STEPHENI C. AGUILA

DIANE E. AVERILL

MARK D. BOWERS

V. STACY BRANHAM

TERRENCE W. CARLSON

HILARY L. CHORNEY

TIMOTHY D. COLLINS

DAVID H. DAVIES

KAREN B. DEVRIES

JENNIFER E. DOWNHAM

DANIEL C. GILBERT

DUANE J. HINKLEY

ANGELA HSU

MILY H. HUBENY

KIM M. KELEMEN

SANDRA L. LETHBRIDGE

LISA M. LOBB

JAMES F. MILLER

MARK A. O’KEEFE

MATTHEW J. VER VAECKE

CHARLES P. WASCZENSKI

CAROLYN A. WILKINS

FIDELITY BANK

SUBSIDIARIES

COMMUNITY BANK INSURANCE AGENCY, INC.
Michael J. Ross, President

COMMUNITY BANK AUDIT SERVICES, INC.
Wynn C. Miller, President

FIDELITY BANK

LOCATIONS

Ann Arbor / Eisenhower Banking Center
250 West Eisenhower Parkway, Suite 100
Ann Arbor, MI 48103
Phone: (734) 302-1481

Auburn Hills Banking Center
3201 University Drive, Suite 180
Auburn Hills, MI 48326
Phone: (248) 364-9700

Bingham Farms Banking Center
30700 Telegraph
Bingham Farms, MI 48025
Phone: (248) 642-6757

Birmingham Banking Center
1040 E. Maple
Birmingham, MI 48009
Phone: (248) 642-1901

Bloomfield Township Banking Office
3681 W. Maple
Bloomfield Township, MI 48301
Phone: (248) 642-1903

Canton Township Banking Office
1325 N. Canton Center Road
Canton. MI 48187
Phone: (734) 981-0022

Clinton Township Banking Office
19100 Hall Road
Clinton Township, MI 48038
Phone: (586) 416-4400

Clinton Township Regional Lending Center
45000 River Ridge Drive, Suite 110
Clinton Township, MI 48038
Phone: (586) 416-0200

Dearborn / Main Office Banking Center
22290 Michigan Avenue
Dearborn. MI 48124
Phone: (313) 274-1000

Dearborn Heights Banking Center
24935 W. Warren Avenue
Dearborn Heights, MI 48127
Phone: (313) 724-0100

Dearborn Administrative and
Regional Lending Center
1360 Porter Street
Dearborn. MI 48124
Phone: (313) 565-5700

Galleria Banking Center
200 Galleria Office Center
Southfield, MI 48034
Phone: (248) 352-1580

Plymouth Township Banking Center
44623 Five Mile
Plymouth Township, MI 48170
Phone: (734) 454-1000

Saline Banking Center
450 E. Michigan Avenue
Saline, MI 48176
Phone: (734) 429-3828

Shelby Township Banking Center
7755 23 Mile Road
Shelby Township, MI 48316
Phone: (586) 254-8700

Southgate Banking Center
12820 Fort Street
Southgate, MI 48195
Phone: (734) 284-3300

Southfield/Twelve Mile Banking Center
20000 12 Mile Road
Southfield, MI 48034
Phone: (248) 559-5779

Bank Operations Center
4000 Allen Road
Allen Park, MI 48101
Phone: (313) 381-3200

Galleria — ATM Only
300 Galleria Office Center
Southfield, MI 48034

Henry Ford Community College — ATM Only
5101 Evergreen Road
Dearborn, MI 48124

Travelers Tower — ATM Only
26555 Evergreen
Southfield, MI 48034

DEARBORN BANCORP, INC. COMMON STOCK

Dearborn Bancorp, Inc. common stock is listed on the Nasdaq Global Market and is traded under the symbol “DEAR”.

INVESTOR RELATIONS AND FORM 10-K AVAILABLE

Additional information about the Corporation including a free copy of the Corporation’s Form 10-K filed with the Securities and Exchange Commission may be obtained by writing or calling: Carolyn Wilkins, Corporate Services Officer, 4000 Allen Road, Allen Park, Michigan 48101; (313) 381-3200 or by E-mail at Carolyn.Wilkins@fidbank.com.

ANNUAL MEETING

The Annual Meeting of Stockholders will be held on Tuesday, May 18, 2010, at Park Place, 23400 Park Avenue, Dearborn, Michigan, at 3:00 p.m.

INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

BKD, LLP
201 North Illinois Street, Suite 700
P. O. Box 44998
Indianapolis, IN 46244-0998
(317)383-3665

STOCK TRANSFER AGENT AND REGISTRAR

Stockholders requiring a change of name, address or ownership of stock, as well as information about shareholder records or lost or stolen certificates, dividend checks, dividend direct deposit, and dividend reinvestment should contact:

Computershare Trust Company, N.A.
P. O. Box 43070
Providence, RI, 02940-3070
(800) 962-4284
www.computershare.com

WEBSITE INFORMATION

Online Information for the most current news releases and Dearborn Bancorp, Inc. financial reports and product information, visit our Website at www.fidbank.com

QUARTERLY COMMON STOCK PRICE INFORMATION


	High		Low		Close
2009
First quarter	$	2.45	$	1.33	$	1.82
Second quarter		3.22		1.75		1.80
Third quarter		2.00		0.80		1.21
Fourth quarter		1.25		0.35		0.46

2008
First quarter	$	8.72	$	5.38	$	7.60
Second quarter		7.70		4.74		4.86
Third quarter		10.00		3.81		4.99
Fourth quarter		6.99		0.93		1.66

All per share amounts presented have been adjusted to reflect the issuance of stock dividends.

PRINCIPAL MARKET MAKERS

Citadel Derivatives Group, LLC
131 South Dearborn Street, 32^nd Floor
Chicago, IL 60603
(312) 395-2100

Credit Suisse Securities USA
11 Madison Ave
New York NY 10010
(212)-325-2000

Domestic Securities Inc
160 Summit Ave
Montvale NJ 07645
(201)-782-0888

E*Trade Capital Markets, LLC
One Financial Place
440 S. Lasalle St., Suite 3030
Chicago, IL 60605
201-499-9858

Hudson Securities Inc
111 Town Square Place Ste 1500A
Jersey City NJ 07310
(201)-216-0100

Goldman Sachs & Co
85 Broad St
New York NY 10004
(212)-902-1000

Howe Barnes Hoefer & Arnett, Inc.
222 S. Riverside Plaza, 7^th Floor
Chicago, Illinois 60606
(312) 655-3000

Knight Equity Markets, L.P.
545 Washington Boulevard
Jersey City, NJ 07310
(201) 557-6886

Merrill Lynch Pierce Fenner
Four World Financial Center
250 Vesey Street
New York NY 10080
(212)-449-1000

McAdams Wright Ragen Inc
925 Fourth Ave Ste 3900
Seattle WA 98104
(206)664-8850

Stifel Nicolaus & Co Inc
1 Financial Plaza
501 N Broadway
St Louis MI 63102
(314)-342-2000

UBS Securities, LLC
677 Washington Blvd., 6^th Floor
Stamford, CT 06901
(203) 719-3000

DEARBORN BANCORP, INC.
1360 Porter Street

Dearborn, Michigan 48124

Phone: (313) 565-5700

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

Dearborn Bancorp (DEAR) Inactive 10-K2009 FY Annual report

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