Dearborn Bancorp (DEAR) 10-Q 2010 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly period ended March 31, 2010

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

For the transition period from                    to                    

Commission file number 000-24478.

DEARBORN BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

(313) 565-5700

(Registrant’s telephone number, including area code)

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

Yesþ Noo

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in rule 12b-2 of the 1934 Securities and Exchange Act).

Large accelerated filero	Accelerated filero	Non-accelerated filero	Smaller Reporting Companyþ
		(Do not check if a smaller reporting Company)

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

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of April 30, 2010.

Class	Shares Outstanding
Common Stock	7,687,470

DEARBORN BANCORP, INC.
INDEX

		Page
Part I.	Financial Information:
Item 1.	Financial Statements
	The following condensed consolidated financial statements of Dearborn Bancorp, Inc. and its subsidiary are included in this report:
	Report of Independent Registered Public Accounting Firm		3
	Condensed Consolidated Balance Sheets — March 31, 2010, December 31, 2009 and March 31, 2009		4
	Condensed Consolidated Statements of Operations — For the Three Months Ended March 31, 2010 and 2009		5
	Condensed Consolidated Statements of Comprehensive Loss — For the Three Months Ended March 31, 2010 and 2009		6
	Condensed Consolidated Statements of Cash Flows — For the Three Months Ended March 31, 2010 and 2009	7-8
	Notes to Condensed Consolidated Financial Statements	9-26
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27-43
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44-47
Item 4.	Controls and Procedures		48
Part II.	Other Information:
Pursuant to SEC rules and regulations, the following item(s) are included with the Form 10-Q Report:
	Item 6. Exhibits		49
Pursuant to SEC rules and regulations, the following items are omitted from this Form 10-Q as inapplicable or to which the answer is negative:
	Item 1. Legal Proceedings
	Item 1A Risk Factors
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3. Defaults upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
SIGNATURES			50
EX-31.1
EX-31.2
EX-32.1
EX-32.2

2

Report of Independent Registered Public Accounting Firm

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

We have reviewed the accompanying condensed consolidated balance sheets of Dearborn Bancorp, Inc. as of March 31, 2010 and 2009 and the related condensed consolidated statements of operations and comprehensive income (loss) and condensed consolidated statements of cash flows for the three-month periods ended March 31, 2010 and 2009. These interim financial statements are the responsibility of the Corporation’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2009 and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 31, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2009 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

BKD, LLP
Indianapolis, Indiana
May 17, 2010

3

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)						(Unaudited)
(Dollars, in thousands)	3/31/2010			12/31/2009			3/31/2009
ASSETS
Cash and cash equivalents
Cash and due from banks	$	8,047		$	7,803		$	11,881
Federal funds sold		57			156			6,841
Interest bearing deposits with banks		70,898			69,538			53,262
Total cash and cash equivalents		79,002			77,497			71,984
Mortgage loans held for sale		758			1,129			3,009
Securities available for sale		45,931			45,964			45,368
Securities held to maturity		336			336			0
Federal Home Loan Bank stock		3,698			3,698			3,614
Loans
Loans		813,961			833,136			900,055
Allowance for loan losses		(30,288	)		(35,125	)		(18,632	)
Net loans		783,673			798,011			881,423
Premises and equipment, net		19,973			20,194			21,001
Real estate owned		24,467			23,435			14,624
Other intangible assets		—			—			4,394
Accrued interest receivable		3,595			3,562			3,920
Other assets		9,266			12,660			24,407
Total assets	$	970,699		$	986,486		$	1,073,744
LIABILITIES
Deposits
Non-interest bearing deposits	$	86,407		$	83,873		$	80,624
Interest bearing deposits		765,610			784,082			826,955
Total deposits		852,017			867,955			907,579
Other liabilities
Securities sold under agreements to repurchase		—			—			2,268
Federal Home Loan Bank advances		63,799			63,855			54,955
Accrued interest payable		956			1,046			1,372
Other liabilities		747			1,685			606
Subordinated debentures		10,000			10,000			10,000
Total liabilities		927,519			944,541			976,780
COMMITMENT AND CONTINGENT LIABILITIES		—			—			—
STOCKHOLDERS’ EQUITY
Common stock — no par value 20,000,000 shares authorized, 7,687,470 at 3/31/10, 7,687,470 shares at 12/31/09 and 7,696, 204 shares at 3/31/09		131,960			131,929			131,825
Accumulated deficit		(88,721	)		(89,850	)		(34,923	)
Accumulated other comprehensive income (loss)		(59	)		(134	)		62
Total stockholders’ equity		43,180			41,945			96,964
Total liabilities and stockholders’ equity	$	970,699		$	986,486		$	1,073,744

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

4

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended			Three Months Ended
(In thousands, except share data)	3/31/2010			3/31/2009
Interest income
Interest on loans	$	11,778		$	13,810
Interest on securities, available for sale		168			256
Interest on deposits with banks		37			94
Interest on federal funds		1			6
Total interest income		11,984			14,166
Interest expense
Interest on deposits		3,543			5,998
Interest on other liabilities		386			651
Total interest expense		3,929			6,649
Net interest income		8,055			7,517
Provision for loan losses		100			10,727
Net interest income (loss) after provision for loan losses		7,955			(3,210	)
Non-interest income
Service charges on deposit accounts		343			355
Fees for other services to customers		36			25
Gain on the sale of loans		58			56
Gain on the sale of securities		69			195
Other than temporary impairment on securities, held to maturity
Portion of loss recognized in other comprehensive income before taxes
Net impairment losses recognized in earnings		—			—
Gain (loss) on the sale of real estate owned		(11	)		29
Loss on the write-down of real estate owned		(656	)		(354	)
Other income		102			22
Total non-interest income (loss)		(59	)		328
Non-interest expense
Salaries and employee benefits		3,119			3,290
Occupancy and equipment expense		854			934
Amortization of intangible expense		—			198
FDIC assessment		950			348
Advertising and marketing		27			70
Stationery and supplies		72			111
Professional services		166			191
Data processing		186			228
Defaulted loan expense		1,035			761
Other operating expenses		359			380
Total non-interest expense		6,768			6,511
Income (loss) before federal income tax expense		1,128			(9,393	)
Income tax expense (benefit)		—			(3,144	)
Net income (loss)	$	1,128			($6,249	)
Per share data:
Net income (loss) — basic		0.15			(0.81	)
Net income (loss) — diluted		0.15			(0.81	)
Weighted average number of shares outstanding — basic		7,687,470			7,696,204
Weighted average number of shares outstanding — diluted		7,687,470			7,696,204

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

5

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

	Three Months Ended		Three Months Ended
(In thousands)	03/31/10		03/31/09
Net income (loss)	$	1,128		($6,249	)
Other comprehensive income , net of tax
Unrealized gains on securities
Unrealized holding gains (losses) arising during period		45		(407	)
Less: reclassification adjustment for gains included in net income		69		195
Tax effects		39		72
Other comprehensive income (loss)		75		(140	)
Comprehensive income (loss)	$	1,203		($6,389	)

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

6

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Three Months Ended
(In thousands)	3/31/2010			3/31/2009
Cash flows from operating activities
Interest and fees received	$	11,951		$	13,745
Interest paid		(4,019	)		(6,972	)
Proceeds from sale of mortgages held for sale		4,654			6,990
Origination of mortgages held for sale		(4,225	)		(8,062	)
Taxes refunded		4,074			—
Loss on sale of real estate owned		(11	)		29
Gain on sale of securities		(69	)		(195	)
Cash paid to suppliers and employees		(7,331	)		(5,090	)
Net cash provided by operating activities		5,024			445
Cash flows from investing activities
Sale of securities available for sale		8,289			10,230
Proceeds from calls, maturities and repayments of securities available for sale		2,514			49,014
Purchases of securities available for sale		(10,689	)		(20,709	)
(Increase) decrease in loans, net of payments received		11,666			20,211
Proceeds from the sale of real estate owned		742			928
Purchases of property and equipment		(47	)		(64	)
Net cash provided by investing activities		12,475			59,610
Cash flows from financing activities
Net decrease in non-interest bearing deposits		2,534			(693	)
Net increase in interest bearing deposits		(18,472	)		(30,123	)
Increase (decrease) in repurchase agreements		—			(193	)
Repayments on Federal Home Loan Bank advances		(56	)		(10,064	)
Net cash used in financing activities		(15,994	)		(41,073	)
Increase in cash and cash equivalents		1,505			18,982
Cash and cash equivalents at the beginning of period		77,497			53,002
Cash and cash equivalents at the end of period	$	79,002		$	71,984

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

7

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

	Three Months Ended
(In thousands)	3/31/2010			3/31/2009
Reconciliation of net income to net cash provided by operating activities
Net income (loss)	$	1,128			($6,249	)
Adjustments to reconcile net income to net cash
Provided by operating activities
Provision for loan losses		100			10,727
Depreciation and amortization expense		268			335
Restricted stock award expense		16			22
Stock option expense		16			19
Accretion of discount on investment securities		(41	)		33
Amortization of premium on investment securities		105			—
Write-down of real estate owned		798			561
Amortization of intangible assets		—			198
(Increase) decrease in mortgages held for sale		371			(1,175	)
Increase in interest receivable		(33	)		(421	)
Decrease in interest payable		(90	)		(323	)
(Increase) decrease in other assets		3,324			(2,851	)
Increase (decrease) in other liabilities		(938	)		(431	)
Net cash provided by operating activities	$	5,024		$	445
Supplemental noncash disclosures:
Transfers from loans to real estate owned	$	2,572		$	6,456

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

8

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A.	Accounting and Reporting Policies
	The condensed consolidated financial statements of Dearborn Bancorp, Inc. (the “Corporation”) include the consolidation of its only subsidiary, Fidelity Bank (the “Bank”). The accounting and reporting policies of the Corporation are in accordance with accounting principles generally accepted in the United States of America and conform to practice within the banking industry.
	The condensed consolidated financial statements of the Corporation as of March 31, 2010 and 2009, and December 31, 2009 and for the three month period ended March 31, 2010 and 2009 reflect all adjustments, consisting of normal recurring items which are in the opinion of management, necessary for a fair presentation of the results for the interim period. The condensed consolidated balance sheet of the Corporation as of December 31, 2009 has been derived from the audited consolidated balance sheet as of that date. The operating results for the three month periods ended March 31, 2010 are not necessarily indicative of results of operations for the entire year.
	The condensed consolidated financial statements as of March 31, 2010 and 2009, and for the three month period ended March 31, 2010 and 2009 included herein have been prepared by the Corporation, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in interim financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereon included in the Corporation’s 2009 Annual Report on Form 10-K.
	Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these material judgments include, but without limitation, changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and determining the fair value of securities and other financial instruments and assessing other than temporary impairments of securities.

9

A.	Accounting and Reporting Policies (con’t)
	Income (Loss) Per Share
	Basic income (loss) per share is net income (loss) divided by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share includes the dilutive effect of additional potential common shares issuable under stock options. Income (loss) per share is restated for all stock splits and dividends through the date of issue of the financial statements.
	Factors in the basic and diluted income (loss) per share calculation follow (in thousands, except share and per share data):

	Three Months Ended
	3/31/2010		3/31/2009
Basic
Net income (loss)	$	1,128		($6,249	)
Weighted average common shares		7,687,470		7,696,204
Basic earnings per common share	$	0.15		($0.81	)
Diluted
Net income (loss)	$	1,128		($6,249	)
Weighted average common shares outstanding for basic earnings per common share		7,687,470		7,696,204
Add: Dilutive effects of assumed exercise of stock options		—		—
Average shares and dilutive potential common shares		7,687,470		7,696,204
Dilutive earnings per common share	$	0.15		($0.81	)

Stock options for 511,717 and 619,742 shares of common stock were not considered in computing diluted earnings per common share for the three months ended March 31, 2010 and 2009, respectively, because they were antidilutive. All share and per share amounts have been adjusted for stock dividends.

10

A.	Accounting and Reporting Policies (con’t)
	Effect of Newly Issued Accounting Standards
	FASB ASC Topic 860-10, Accounting for Transfers of Financial Assets (“SFAS 166”), and No. 167, Amendments toFASB ASC 810-10(“SFAS 167”).In June 2009, the Financial Accounting Standards Board (“FASB”) issued FASB ASC Topic 860-10 and FASB ASC 810-10, which change the way entities account for securitizations and special-purpose entities, and will have a material effect on how banking organizations account for off-balance sheet vehicles. The new standards amend Statement of FASB ASC 860-10, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and FASB ASC 810-10, Consolidation of Variable Interest Entities. Both FASB ASC Topic 860-10 and FASB ASC Topic 810-10 were effective January 1, 2010 for companies reporting earnings on a calendar-year basis.
	On January 21, 2010, the Board of Governors of the Federal Reserve System issued final risk-based capital rules related to the adoption of these accounting standards by financial institutions. FAS 166 and FAS 167 make substantive changes to how banking organizations account for many items, including securitized assets, that had been previously excluded from their balance sheets. Banking organizations affected by FAS 166 and FAS 167 generally will be subject to higher risk-based regulatory capital requirements intended to better align risk-based capital requirements with the actual risks of certain exposures.
	The Corporation has adopted these standards, and takes into account in our internal capital planning processes the impact of these standards. We continue to assess whether additional capital may be necessary to support the risks associated with off-balance-sheet vehicles affected by the new accounting standards. The implementation of these standards did not have a material impact on the Corporation’s financial statements.
	FASB ASU 2010-09, Subsequent Event – Amendments to Certain Recognition and Disclosure Requirements. On February 24, 2010, FASB issued Accounting Standards Update (ASU) 2010-09, Subsequent Event – Amendments to Certain Recognition and Disclosure Requirements. The ASU establishes separate subsequent event recognition criteria and disclosure requirements for U.S. Securities and Exchange Commission (“SEC”) filers. Effective with the release date, the financial statements of SEC filers will no longer disclose either the date through which subsequent events were reviewed or that subsequent events were evaluated through the date financial statements were issued. The requirement to evaluate subsequent events through the date of issuance is still in place. Only the disclosure is affected.
	The ASU also removes the requirement to make those disclosures in financial statements revised for either a correction of an error or a retrospective application of an accounting change. SEC filers are defined in the update as entities required to file or to furnish their financial statements with either the SEC or another appropriate agency (such as the Federal Deposit Insurance Corporation or Office of Thrift Supervision) under Section 12(i) of the Securities and Exchange Act of 1934, as amended.

11

B. Securities

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

	March 31, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
US Government sponsored agency securities	$	2,009	$	—		($6	)	$	2,003
Corporate bonds		43,895		11		(67	)		43,839
Mortgage backed securities		86		3		—			89
Totals	$	45,990	$	14		($73	)	$	45,931

	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

The amortized cost and fair value of securities available for sale at March 31 2010 by contractual maturity are shown below (in thousands):

	Amortized		Fair
	Cost		Value
Due in one year through five years	$	45,904	$	45,842
Mortgage backed securities		86		89
Totals	$	45,990	$	45,931

The entire portfolio has a net unrealized loss of $59,000 at March 31, 2010. The Corporation does not hold or utilize derivatives.

12

B. Securities (con’t)

Securities with unrealized losses at March 31, 2010 and December 31, 2009, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

	March 31, 2010
Investment category	Less than one year					One year or more				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Loss			Value		Loss		Value		Loss
US Government sponsored entity securities	$	2,003		($6	)	$	—	$	—	$	2,003		($6	)
Corporate bonds		35,188		(67	)		—		—		35,188		(67	)
Total temporarily impaired	$	37,191		($73	)	$	—	$	—	$	37,191		($73	)

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

Sales of available for sale securities for the three months ended March 31, 2010 and 2009 are as follows (in thousands):

	For the three months ended
	3/31/2010		3/31/2009
Gross Gains	$	69	$	195
Gross Losses		—		—

Securities having a carrying value of $16,413,000 and $5,524,000 at March 31, 2010 and December 31, 2009, respectively, were pledged to secure clearing requirements and borrowings.

13

B. Securities (con’t)

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):

	March 31, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Trust preferred securities	$	336	$	21	$	—	$	357
Totals	$	336	$	21	$	—	$	357

	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 are 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 March 31, 2010. 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 during 2009.

Credit losses on debt securities held	Amount
Balance, January 1, 2010	$	414
Additions related to other than temporary
Losses not previously recognized		—
Balance, March 31, 2010	$	414

14

C. Loans and Allowance for Loan Losses

Major categories of loans included in the loan portfolio are as follows (in thousands):

	03/31/10			12/31/09			03/31/09
Consumer loans	$	28,623		$	29,386		$	31,000
Commercial, financial, & other		141,338			144,630			161,138
Land development loans — residential property		36,089			38,472			50,028
Land development loans — non residential property		9,711			11,644			15,914
Commercial real estate construction — residential property		12,164			13,287			15,687
Commercial real estate construction — non residential property		20,813			20,061			25,716
Commercial real estate mortgages		521,701			531,156			548,692
Residential real estate mortgages		43,522			44,500			51,880
		813,961			833,136			900,055
Allowance for loan losses		(30,288	)		(35,125	)		(18,632	)
	$	783,673		$	798,011		$	881,423

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

	3/31/10		12/31/09		03/31/09
Troubled debt restructuring, accruing	$	31,737	$	59,420	$	19,506
Over 90 days past due and still accruing		1,127		—		—
Non-accrual loans		81,163		49,341		55,148
Total non-performing loans		114,027		108,761		74,654
Real estate owned		24,467		23,435		14,624
Other repossessed assets		—		—		—
Other non-performing assets		24,467		23,435		14,624
Total non-performing assets	$	138,494	$	132,196	$	89,278

The most significant proportion of the Bank’s non-performing loans continues to be in the land development and commercial real estate construction segments of the Bank’s loan portfolio. These loans comprise 10% of loans and 46% of non accrual loans at March 31, 2010. Management has implemented a strategy to decrease the amount of loans in these segments. These loans have decreased 6% during the first quarter of 2010, while the loan portfolio has declined by 2% during the same period.

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

15

C. Loans and Allowance for Loan Losses (con’t)

	Number of
	Loans		Balance
Consumer loans		16	$	924
Commercial, financial, & other		43		12,749
Land development loans — residential property		21		23,260
Land development loans — non residential property		2		1,558
Commercial real estate construction — residential property		15		9,573
Commercial real estate construction — non residential property		2		2,870
Commercial real estate mortgages		55		27,863
Residential real estate mortgages		14		2,366
Total non-accrual loans		168	$	81,163

The increase in non-accrual loans during the period was primarily due to the downgrading of 34 loans to non-accrual status for $32,315,000 and partially offset by net charge-offs of $4,937,000 and the transfer of 6 loans to other real estate for $2,572,000. This increase was primarily due to the migration of previously identified classified loans. Of this increase, all but approximately $2,600,000 were identified at December 31, 2009 as classified loans with reserves for losses established accordingly.

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

	Three Months						Three Months
	Ended			Year Ended			Ended
	03/31/10			12/31/09			03/31/09
Balance, beginning of year	$	35,125		$	14,452		$	14,452
Charge-offs:
Consumer loans		342			1,154			116
Commercial, financial & other		1,521			4,878			1,108
Land development loans — residential property		1,292			9,441			2,881
Land development loans — non residential property		229			4,364			197
Commercial real estate construction — residential property		906			1,471			64
Commercial real estate construction — non residential property		36			1,981			176
Commercial real estate mortgages		558			6,919			2,113
Residential real estate mortgages		109			701			25
Recoveries:
Consumer loans		23			176			3
Commercial, financial & other		15			339			105
Land development loans — residential property		9			107			—
Commercial real estate construction — residential property		1			—			—
Commercial real estate mortgages		8			61			25
Residential real estate mortgages		—			36			—
Net charge-offs (recoveries)		4,937			30,190			6,547
Provision for loan losses		100			50,863			10,727
Balance, end of period	$	30,288		$	35,125		$	18,632
Allowance to total loans		3.72	%		4.22	%		2.07	%
Allowance to nonperforming assets		26.56	%		32.30	%		24.96	%
Net charge-offs to average loans		0.60	%		3.41	%		0.71	%

16

C.	Loans and Allowance for Loan Losses (con’t)
	The Bank recorded net charge-offs of $4,937,000 during the three months ended March 31, 2010. Specific allocations of $4,058,000 were recorded on these loans at December 31, 2009. These specific allocations were assigned because most of the charge-offs recorded during the first quarter of 2010 were based on information that was received in 2010 but where deterioration of the credit related to events that occurred in 2009. The remaining net charge-offs, which amount to $879,000 were on smaller balance loans that had a reserve for loan losses allocated to the loan based on their respective risk grading at December 31, 2009. As a result of these allocation recognized at December 31, 2009, it was determined no additional provision was needed related to these loans during the first quarter of 2010. The reserves established for classified loans are based on the information currently available to the Corporation. However, in these challenging economic conditions, information could become known in the future that could materially alter our estimate.
	A primary factor in the continued decline in the underlying value of our collateral and the decision to recognize these charge-offs was the continuing decline during the first three months of 2010 in the economic environment in Southeastern Michigan. This decline in economic conditions is heavily impacted by conditions and events that have recently impacted the automotive industry during 2009 and continue to impact the local economy. These conditions have had a negative impact on the residential real estate and commercial real estate markets in the Bank’s market area and these loans represent 79% of the Bank’s loan portfolio. These conditions have led to an increase in the Bank’s classified assets during 2010. Management has recognized this trend in our analysis of the allowance for loan losses at March 31, 2010. The allowance for loan losses was based upon management’s assessment of relevant factors, including loan growth, types and amounts of non-performing loans, historical and anticipated loss experience on such types of loans, and current economic conditions. If collateral values continue to decline, additions to the allowance for loan losses will be required and will have an adverse effect on the Corporation’s earnings through increases to the provision for loan losses.
	The aggregate balance in impaired loans are as follows (in thousands):

	03/31/10		12/31/09		03/31/09
Impaired loans with no allocated allowance for loan losses	$	88,079	$	83,226	$	95,499
Impaired loans with allocated allowance for loan losses		26,074		43,553		12,600
Total	$	114,153	$	126,779	$	108,099
Amount of the allowance for loan loss allocated	$	6,827	$	10,715	$	4,915

17

D.	Incentive Stock Plans
	Incentive stock awards have been granted to officers and employees under two Incentive Stock Plans. The first plan is the 1994 Stock Option Plan. Options to buy common stock have been granted to officers and employees under the 1994 Stock Option Plan, which provides for issue of up to 738,729 shares. Exercise price is the market price at date of grant. The maximum option term is ten years, and options vest fully after six months from the date of grant.
	There were 24,000 shares forfeited during the three months ended March 31, 2010. There were no options exercised during the three months ended March 31, 2010. For the options outstanding at March 31, 2010, the range of exercise prices was $4.28 to $14.65 per share with a weighted-average remaining contractual term of 1.9 years. At March 31, 2010, options for 336,398 shares were exercisable at weighted average exercise price of $8.89 per share. There was no intrinsic value at March 31, 2010.
	During 2005, the Corporation initiated the 2005 Long-Term Incentive Plan. Under this plan, up to 347,248 shares may be granted to officers and employees of the Bank. This plan provides that stock awards may take the form of any combination of options, restricted shares, restricted share units or performance awards.
	The administration of the plan, including the granting of awards and the nature of those awards is determined by the Corporation’s Compensation Committee. The Corporation’s Board of Directors approved grants of stock options and restricted stock in 2005, 2006 and 2008. The awards have a term of ten years and typically vest fully three years from the grant date. In order for vesting to occur with some grants, the Corporation must meet certain performance criteria over the vesting period. The expected compensation cost of the 2005 plan is being calculated assuming the Corporation’s attainment of “target” performance goals over the vesting period of the awards. The actual cost of these awards could range from zero to 100% of the currently recorded compensation cost, depending on the Corporation’s actual performance. The awards granted in 2005 and 2006 did have such performance criteria. The awards granted in 2008 did not have performance criteria.
	Stock Options Granted — Stock options were awarded to officers in 2005, 2006 and 2008. The incentive stock options were granted with exercise prices equal to market prices on the day of grant. At March 31, 2010, there were stock options outstanding for 190,846 shares with a weighted average exercise price of $5.33 per share.
	The Corporation recognized stock option compensation expense of $16,000 and $19,000 during the three months ended March 31, 2010 and 2009, respectively. Compensation cost of $62,000 and $26,000 is expected to be recognized during 2010 and 2011, respectively.
	Restricted Stock Grants — Restricted stock was awarded to officers in 2005, 2006 and 2008. The restricted stock is eligible to vest three years from grant date. Upon full vesting, restricted shares are transferred to common shares. At March 31, 2010, there were 41,530 shares of restricted stock outstanding.

18

D.	Incentive Stock Plans (con’t)
	The Corporation recognized restricted stock compensation expense of $16,000 and $22,000, respectively during the three months ended March 31, 2010 and 2009, respectively. Compensation cost of $62,000 and $26,000 is expected to be recognized during 2010 and 2011, respectively.
E.	Fair Value of Assets and Liabilities
	The Corporation has adopted fair value guidance which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
	Fair value is defined 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. A fair value hierarchy was also established 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. Observable inputs may include available credit information and bond terms and conditions of similar securities, market spreads, cash flow analysis and market concensus prepayment speeds.
	Level 2 securities include U.S. agency and U.S. government sponsored enterprise mortgage-backed securities. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping and matrix pricing. In addition, model processes, such as an option adjusted spread model is used to develop prepayment and interest rate scenarios for securities with prepayment features.
Level 3 —	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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E.	Fair Value of Assets and Liabilities ( con’t)
	Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to our valuation hierarchy.
	Securities available for sale
	Fair values of securities, available for sale are estimated by a third party using inputs that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy.
	The following table presents the fair value measurements of the Corporation’s assets and liabilities recognized in the accompanying balance sheet measured at fair value on a recurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fall at March 31, 2010, December 31, 2009 and March 31, 2009 (in thousands):

			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
At 3/31/2010	Fair Value		(Level 1)		(Level 2)		(Level 3)
US Government sponsored agency securities	$	2,003	$	—	$	2,003	$	—
Corporate bonds		43,839		—		43,839		—
Mortgage backed securities		89		—		89		—
Total securities, available for sale	$	45,931	$	—	$	45,931	$	—

			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
At 12/31/2009	Fair Value		(Level 1)		(Level 2)		(Level 3)
US Government sponsored agency 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	$	—

			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
At 3/31/2009	Fair Value		(Level 1)		(Level 2)		(Level 3)
US Government sponsored agency securities	$	28,657	$	—	$	28,657	$	—
Corporate bonds		15,205		—		15,205		—
Municipal securities		1,335		—		1,335		—
Mortgage backed securities		171		—		171		—
Total securities, available for sale	$	45,368	$	—	$	45,368	$	—

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E.	Fair Value of Assets and Liabilities ( con’t)
	Impaired loans and other real estate owned
	Fair value adjustments for impaired and non-accrual loans typically occur when there is evidence of impairment. Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. The Company measures fair value based on the value of the collateral securing the loans. Collateral may be in the form of real estate or personal property including equipment and inventory. The value of the collateral is determined based on internal estimates as well as third party appraisals or non-binding broker quotes. These measurements were classified as Level 3. The fair value of the Company’s other real estate owned is determined using Level 3 inputs, which include current and prior appraisals and estimated costs to sell.
	The following table presents the fair value measurements of the Corporation’s assets and liabilities recognized in the accompanying balance sheet measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2010, December 31, 2009 and March 31, 2009 (in thousands):

					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
At 3/31/2010	Fair Value		(Level 1)		(Level 2)		(Level 3)
Loans	$	58,280	$	—	$	—	$	58,280
Other real estate	$	9,490	$	—	$	—	$	9,490

					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		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

					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
At 3/31/2009	Fair Value		(Level 1)		(Level 2)		(Level 3)
Loans	$	11,461	$	—	$	—	$	11,461
Other real estate	$	2,094	$	—	$	—	$	2,094

21

E.	Fair Value of Assets and Liabilities ( con’t)
	The carrying amounts and estimated fair value of principal financial assets and liabilities were as follows:

	At March 31, 2010				At December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets:
Cash and cash equivalents	$	79,002	$	79,002	$	77,497	$	77,497
Mortgage loans held for sale		758		769		1,129		1,146
Securities available for sale		45,931		45,931		45,964		45,964
Federal Home Loan Bank Stock		3,698		3,698		3,698		3,698
Loans, net		813,961		829,122		833,136		829,122
Accrued interest receivable		3,595		3,595		3,562		3,562
Liabilities:
Deposits		852,017		856,075		867,955		871,177
Federal Home Loan Bank advances		63,799		64,291		63,855		64,275
Subordinated debentures		10,000		4,081		10,000		4,081
Accrued interest payable		956		956		1,046		1,046

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.

22

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

F.	Capital and Operating Matters
	Stockholders’ equity at March 31, 3010 was $43,180,000 compared to $41,945,000 as of December 31, 2009, an increase of $1,235,000 or 3%. The increase was due to net income during the period.

23

F.	Capital and Operating Matters (con’t)
	The Corporation has experienced large net losses during 2008 and 2009 due to the continued decline in economic conditions in Southeastern Michigan. The recent bankruptcy of two major automotive manufacturers and resulting shut down of production and layoffs of employees have negatively affected the operating results even though the Corporation does not have any direct exposure to the automotive industry. Additionally, economic conditions have continued to erode the value of residential real estate and commercial real estate in the Bank’s market area causing write-downs in the real estate owned portfolio further contributing to net losses. The impact of these net losses to the regulatory capital ratios is shown below.
	Based on the respective regulatory capital ratios, the Bank is considered to be undercapitalized at March 31, 2010 and December 31, 2009.
	The following is a presentation of the Corporation’s and Bank’s regulatory capital ratios (in thousands):

											Minimum
											To Be Well Capitalized
						Minimum for Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2010
Total capital (to risk weighted assets)
Consolidated		63,839		7.69	%		66,418		8.00	%		N/A		N/A
Bank		62,120		7.50	%		66,262		8.00	%		82,828		10.00	%
Tier 1 capital (to risk weighted assets)
Consolidated		53,239		6.41	%		33,209		4.00	%		N/A		N/A
Bank		51,520		6.22	%		33,131		4.00	%		49,697		6.00	%
Tier 1 capital (to average assets)
Consolidated		53,239		5.47	%		38,956		4.00	%		N/A		N/A
Bank		51,520		5.30	%		38,878		4.00	%		48,598		5.00	%
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	%

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F.	Capital and Operating Matters (con’t)
	The capital ratios disclosed in the middle column of the table above are minimum requirements. Due to our financial condition, the Bank entered into a formal enforcement action (“Consent Order”) with the Federal Deposit Insurance Corporation (“FDIC”) and the Office of Financial and Insurance Regulation for the State of Michigan (“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 that 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.
	Applicable federal prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Based on its regulatory capital ratios, the Bank is undercapitalized at March 31, 2010. 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.
	The Corporation needs to raise sufficient capital during 2010 to return the Bank to well-capitalized status. Management is considering various sources of capital and estimates the need to raise approximately $40 million to be in compliance with its Consent Order with the FDIC and OFIR. Given the current economic environment, there can be no assurance the Corporation will be able to raise the estimated capital needed. Additionally, if real estate values in the Corporation’s market area continue to decline, this will negatively impact the loan portfolio and values of other real estate owned. Additional declines in real estate values would result in the need for additional provision expense resulting in increased losses and further reducing the Corporation’s and the Bank’s capital.
	Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, action by the regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements and raise substantial doubt about the Corporation’s ability to continue as a going concern.

25

G.

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 March 31, 2010, the Bank’s capital ratio was 5.30% and the Bank’s total risk-based capital ratio was 7.50%.

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.

26

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

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on current expectations. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “projects,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Actual results and outcomes may materially differ from what is expressed in forward-looking statements. 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; actions by bank regulators; availability of capital; changes in local real estate values; changes in the national and local economy; and other factors, including risk factors disclosed in this report, the Corporation’s 2009 Annual Report on Form 10-K, or disclosed from time to time in other filings made by the Corporation with the Securities and Exchange Commission. These are representative of the Future Factors and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

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Company Overview

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

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

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

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

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

In 2007, the Corporation acquired Fidelity Financial Corporation of Michigan (“Fidelity”), the holding company for Fidelity Bank, a commercial bank with seven offices in Oakland County, Michigan. The acquisition has significantly expanded the Bank’s presence in Oakland County, Michigan. Additionally, the Bank opened a full service banking office in Shelby Township, Michigan on April 30, 2007. The Bank currently operates seventeen banking offices in Wayne, Macomb, Oakland and Washtenaw Counties, Michigan.

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

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

28

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

Date Opened	Location	Type of office
February 1994	22290 Michigan Avenue	Full service retail branch with ATM
	Dearborn, Michigan 48123	Regional lending center
December 1995	24935 West Warren Avenue	Full service retail branch
	Dearborn Heights, Michigan 48127
August 1997	44623 Five Mile Road	Full service retail branch with ATM
	Plymouth, Michigan 48170
May 2001	1325 North Canton Center Road	Full service retail branch with ATM
	Canton, Michigan 48187
December 2001	45000 River Ridge Drive	Regional lending center
	Clinton Township, Michigan 48038
November 2002	19100 Hall Road	Full service retail branch with ATM
	Clinton Township, Michigan 48038
February 2003	12820 Fort Street	Full service retail branch with ATM
	Southgate, Michigan 48195
May 2003	3201 University Drive, Suite 180	Full service retail branch
	Auburn Hills, Michigan 48326
October 2004	450 East Michigan Avenue	Full service retail branch with ATM
	Saline, Michigan 48176
October 2004	250 West Eisenhower Parkway	Full service retail branch with ATM
	Ann Arbor, Michigan 48103	Regional lending center
December 2004	1360 Porter Street	Loan production office
	Dearborn, Michigan 48123	Regional lending center
January 2007	1040 E. Maple	Full service retail branch with ATM
	Birmingham, Michigan 48009	Regional lending center
January 2007	3681 W. Maple	Full service retail branch with ATM
	Bloomfield Township, Michigan 48301
January 2007	30700 Telegraph	Full service retail branch with ATM
	Bingham Farms, Michigan 48025
January 2007	20000 Twelve Mile Road	Full service retail branch with ATM
	Southfield, Michigan 48076
January 2007	200 Galleria Officenter	Full service retail branch with ATM
	Southfield, MI 48076
April 2007	7755 23 Mile Road	Full service retail branch with ATM
	Shelby Township, Michigan 48075

29

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

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

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

The Corporation recorded net income of $1,128,000 during the three months ended March 31, 2010, compared to a net loss of ($6,249,000) during the same period during 2009. The primary factor in the increase in earnings was the decrease in provision for loan losses during the three months ended March 31, 2010, which was partially offset by higher costs related to the Bank’s non-performing assets and an increase in the Bank’s FDIC assessment during the three months ended March 31, 2010 and the income tax benefit recognized during the three months ended March 31, 2009.

The Corporation recorded provision for loan loss during the three months ended March 31, 2010 in the amount of $100,000, compared to $10,727,000 during the same period in 2009. Net charge-offs of $4,937,000 were recorded during the period. However, these loans had specific allocations of $4,058,000 in the allowance for loan loss at December 31, 2009. The percentage of allowance for loan loss to loans was 3.72% and 2.07% at March 31, 2010 and 2009, respectively.

Other costs related to non-performing assets during the three months ended March 31, 2010 amounted to $1,702,000, compared to $1,086,000 during the same period in 2009, an increase of $576,000 or 57%. These costs consisted of defaulted loan expense of $1,035,000 and write-downs on real estate owned of $656,000 during the three months ended March 31, 2010 compared to defaulted loan expense of $761,000 and write-downs on real estate owned of $354,000 during the three months ended March 31, 2009. Additionally, the Corporation recorded FDIC assessment expense in the amount of $950,000 during the three months ended March 31, 2010 compared to $348,000 during the three months ended March 31, 2009.

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.

30

Management continues 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 2010, the Bank will continue to focus on the reduction of non-performing assets. The Special Assets Department was created in 2008 to reduce the amount of non-performing assets and to manage the special assets portfolio effectively. In 2009, additional resources were provided 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.

Net Interest Income

2010 Compared to 2009.As noted on the chart on the following page, net interest income for the three month period ended March 31, 2010 was $8,055,000, compared to $7,517,000 for the same period ended March 31, 2009, an increase of $538,000 or 7% for the period. This increase was caused primarily by the increasing spread between interest earning assets and interest bearing liabilities. The Corporation’s interest rate spread was 3.27% and 2.58% for the three month period ended March 31, 2010 and 2009, respectively. The Corporation’s interest rate margin was 3.47% and 2.93% for the three month period ended March 31, 2010 and 2009, respectively. The decline in the Corporation net interest spread and net interest margin was primarily due to the decline in the Bank’s cost on 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 loan category.

31

	Three months ended March 31, 2010							Three months ended March 31, 2009
	Average				Average			Average				Average
(In thousands)	Balance		Interest		Rate			Balance		Interest		Rate
Assets
Interest bearing deposits with banks	$	65,286	$	37		0.23	%	$	45,249	$	94		0.84	%
Federal funds sold		119		1		3.41	%		6,643		6		0.37	%
Securities, available for sale		49,835		168		1.37	%		67,465		256		1.54	%
Loans		826,719		11,778		5.78	%		920,254		13,810		6.09	%
Sub-total earning assets		941,959		11,984		5.16	%		1,039,611		14,166		5.53	%
Other assets		31,949							59,947
Total assets	$	973,908						$	1,099,558
Liabilities and stockholders’ equity
Interest bearing deposits	$	769,744	$	3,543		1.87	%	$	842,023	$	5,998		2.89	%
Other borrowings		73,828		386		2.12	%		73,326		651		3.60	%
Sub-total interest bearing liabilities		843,572		3,929		1.89	%		915,349		6,649		2.95	%
Non-interest bearing deposits		84,327							78,090
Other liabilities		2,442							1,821
Stockholders’ equity		43,567							104,298
Total liabilities and stockholders’ equity	$	973,908						$	1,099,558
Net interest income			$	8,055						$	7,517
Net interest rate spread						3.27	%						2.58	%
Net interest margin on earning assets						3.47	%						2.93	%

32

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.

	For the Three Months Ended March 31, 2010/2009
	Change in Interest Due to:
	Average			Average			Net
(In thousands)	Balance			Rate			Change
Assets
Interest bearing deposits with banks	$	12			($69	)		($57	)
Federal funds sold		(55	)		50			(5	)
Investment securities, available for sale		(59	)		(29	)		(88	)
Loans		(1,327	)		(705	)		(2,032	)
Total earning assets		($1,430	)		($752	)		($2,182	)
Liabilities
Interest bearing deposits		($315	)		($2,140	)		($2,455	)
Other borrowings		5			(270	)		(265	)
Total interest bearing liabilities		($310	)		($2,410	)		($2,720	)
Net interest income							$	538
Net interest rate spread								0.69	%
Net interest margin on earning assets								0.54	%

Provision for Loan Losses

2010 Compared to 2009.The provision for loan losses was $100,000 for the three month period ended March 31, 2010, compared to $10,727,000 for the same period in 2009, a decrease of $10,627,000 or 99%. The percentage of allowance for loan loss to loans was 3.72%, 4.22% and 2.07% at March 31, 2010, December 31, 2009 and March 31, 2009, respectively. The decline in this ratio during the three month period ended March 31, 2010 is due to net charge-offs of $4,937,000 were recorded during the three months ended March 31, 2010 compared to net charge-offs of $6,547,000 for the same period in 2009. However, specific allocations of $4,058,000 were recorded on these loans at December 31, 2009. These specific allocations were assigned because many of the charge-offs recorded during the first quarter of 2010 were based on information that was received in 2010 but was relevant to the fair value of the collateral at December 31, 2009. The remaining net charge-offs, which amount to $879,000 were on smaller balance loans that had a reserve for loan losses allocated to the loan based on their respective risk grading at December 31, 2009. As a result of these allocation recognized at December 31, 2009, it was determined no additional provision was needed related to these loans during the first quarter of 2010.

33

Non-accrual loans increased by $31,822,000 during the quarter ended March 31, 2010. This increase was due to the migration of primarily previously identified classified loans. Of this increase, all but approximately $2,600,000 were identified at December 31, 2009 as classified loans with reserves for losses established accordingly. While these loans were transferred to non-accrual status during the first quarter of 2010, the impact of these loans on the allowance for loan loss was reflected in the income statement for the year ended December 31, 2009 as these loans were previously identified as problem loans.

The decline in the underlying collateral for the Bank’s non-performing loans, which are primarily due to the decline in economic conditions in Southeastern Michigan has continued during the three months ended March 31, 2010. This decline in economic conditions is heavily impacted by conditions and events that have recently impacted the automotive industry during 2009, including the bankruptcy of two major automotive manufacturers and resulting shut down of production and layoffs of employees. These events continue to have a negative impact on the residential real estate and commercial real estate markets in the Bank’s market area. These conditions have led to an increase in the Bank’s classified assets during 2010. Management has recognized this trend in our analysis of the allowance for loan losses at March 31, 2010.

The provision for loan losses for the three month periods ended March 31, 2010 is based on the internal analysis of the adequacy of the allowance for loan losses. The provision for loan losses was based upon management’s assessment of relevant factors, including types and amounts of non-performing loans, historical loss experience on such types of loans, and current economic conditions.

Non-interest Income (Loss)

2010 Compared to 2009.Non-interest loss was ($59,000) for the three month period ended March 31, 2010, compared to non-interest income of $328,000 for the same period in 2009. The decrease in non-interest income was primarily due to the increase in write-downs on other real estate during 2010.

When these transactions related to other real estate and securities are excluded, non-interest income for the three month period ended March 31, 2010 amounts to $539,000 compared to $458,000 during the same period in 2009, an increase of $81,000 or 22% for the period. This increase is primarily caused by the increase in other income.

34

Non-interest Expense

2010 Compared to 2009.Non-interest expense was $6,768,000 for the three month period ended March 31, 2010, compared to $6,511,000 for the same period in 2009, an increase of $257,000 or 4% for the period. The increase was primarily due to increases in defaulted loan expense and the FDIC assessment and partially offset by decreases to salaries and employee benefits and occupancy expense.

Defaulted loan expense amounted to $1,035,000 during the three month period ended March 31, 2010 compared to $761,000 during the same periods in 2009, an increase of $274,000 or 36% for the period. This increase in defaulted loans expense was primarily due to the payment of property taxes, insurance, legal expenses and maintenance for real estate owned during the period.

The FDIC assessment amounted to $950,000 during the three month period ended March 31, 2010 compared to $348,000 during the same period in 2009, an increase of $602,000 or 173% for the period. The increase in the FDIC assessment was due to the decline in the capitalization status to undercapitalized during the fourth quarter of 2009.

Salaries and employee benefits amounted to $3,119,000 for the three month period ended March 31, 2010, compared to $3,290,000 for the same period in 2009, a decrease of $171,000 or 5%. As of March 31, 2010, the number of full time equivalent employees was 195 compared to 208 as of March 31, 2009.

Income Tax Provision

2010 Compared to 2009.Income tax expense was $0 for the three month period ended September 30, 2009, compared to an income tax benefit of $3,144,000 for the same period in 2009. The benefit for the three month period ended March 31, 2009 was the result of the pretax loss incurred during that period. During 2009, the Corporation recorded a valuation allowance against the entire amount of its deferred tax asset. The Corporation has sufficient federal income tax carryforwards to offset any provision for federal income tax. Therefore, no income tax provision was recorded for the three month period ended March 31, 2010.

35

Comparison of Financial Condition at March 31, 2010 and December 31, 2009

Assets.Total assets at March 31, 2010 were $970,699,000 compared to $986,486,000 at December 31, 2009, a decrease of $15,787,000 or 2%. The decrease was primarily due to the decrease in loans.

Interest bearing deposits with banks.Total interest bearing deposits with banks at March 31, 2010 were $70,898,000 compared to $69,538,000 at December 31, 2009, an increase of $1,360,000 or 2%. The increase is primarily due to the Bank’s decision to retain excess funds with the Federal Reserve Bank to improve our liquidity and capital position. Interest bearing deposits with banks consists primarily of overnight deposits with the Federal Reserve Bank, business accounts with other correspondents banks and time deposits from other banks. These time deposits are fully insured and mature in less than twelve months.

Mortgage Loans Held for Sale.Total mortgage loans held for sale at March 31, 2010 were $758,000 compared to $1,129,000 at December 31, 2009, a decrease of $371,000 or 33%. This decrease was a result of the decrease in the level of residential real estate mortgage loans waiting to be purchased by mortgage correspondents.

Securities — Available for Sale.Total securities, available for sale, at March 31, 2010 were $45,931,000 compared to $45,964,000 at December 31, 2009, a decrease of $33,000. The decrease is the result of the fluctuation in the market value of securities, available for sale that are held by the Corporation.

Please refer to Note B of the Notes to Condensed Consolidated Financial Statements for the amortized cost and estimated market value of securities, available for sale. The entire portfolio has a net unrealized loss of $59,000 at March 31, 2010. The unrealized gain, net of tax is reflected by an adjustment to stockholders’ equity.

Federal Home Loan Bank Stock.Federal Home Loan Bank stock was valued at $3,698,000 at March 31, 2010 and December 31, 2009.

Loans.Total loans at March 31, 2010 were $813,961,000 compared to $833,136,000 at December 31, 2009, a decrease of $19,175,000 or 2%. The decrease was primarily due to net charge-offs of $4,938,000, the transfer of loans in the amount of $2,572,000 to other real estate and normal loan amortization during the period. Management expects loan balances to continue to decline during 2010. Major categories of loans included in the loan portfolio are as follows (in thousands):

36

	03/31/10			12/31/09			03/31/09
Consumer loans	$	28,623		$	29,386		$	31,000
Commercial, financial, & other		141,338			144,630			161,138
Land development loans — residential property		36,089			38,472			50,028
Land development loans — non residential property		9,711			11,644			15,914
Commercial real estate construction — residential property		12,164			13,287			15,687
Commercial real estate construction — non residential property		20,813			20,061			25,716
Commercial real estate mortgages		521,701			531,156			548,692
Residential real estate mortgages		43,522			44,500			51,880
		813,961			833,136			900,055
Allowance for loan losses		(30,288	)		(35,125	)		(18,632	)
	$	783,673		$	798,011		$	881,423

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

	3/31/10		12/31/09		03/31/09
Troubled debt restructuring, accruing	$	31,737	$	59,420	$	19,506
Over 90 days past due and still accruing		1,127		—		—
Non-accrual loans		81,163		49,341		55,148
Total non-performing loans		114,027		108,761		74,654
Real estate owned		24,467		23,435		14,624
Other repossessed assets		—		—		—
Other non-performing assets		24,467		23,435		14,624
Total non-performing assets	$	138,494	$	132,196	$	89,278

The increase in non-performing loans was largely due to the increase in non-accrual loans, which amount to $81,163,000 and $49,341,000 at March 31, 2010 and December 31, 2009, respectively, and were substantially offset by the decrease in loans that qualify as troubled debt restructuring, which amounted to $31,737,000 and $59,420,000 at March 31, 2010 and December 31, 2009, respectively. The distribution of non-accrual loans by loan type (in thousands) is as follows:

	Number of
	Loans		Balance
Consumer Loans		16	$	924
Commercial Loans		43		12,749
Land Development — Residential		21		23,260
Land Development — Non Residential		2		1,558
Commercial Construction Loans — Residential		15		9,573
Commercial Construction Loans — Non Residential		2		2,870
Commercial Mortgage Loans		55		27,863
Residential Mortgages Loans		14		2,366
Totals		168	$	81,163

The increase in non-accrual loans during the period was primarily due to the downgrading of 34 loans to non-accrual status for $32,314,000 and partially offset by net charge-offs of $4,937,000 and the transfer of 6 loans to other real estate for $2,572,000. A summary of the loans transferred to non-accrual status during the three months ended March 31, 2010 is listed below:

37

	Number of Loans		Balance
Consumer Loans		1	$	137
Commercial Loans		8		3,381
Land Development — Residential		8		14,239
Land Development — Non Residential		1		240
Commercial Construction Loans — Residential		1		3,875
Commercial Mortgage Loans		10		9,870
Residential Mortgages Loans		5		573
Totals		34	$	32,314

Loans qualifying as troubled debt restructuring amounted to $31,737,000 and $59,420,000 at March 31, 2010 and December 31, 2009, respectively. These loans qualified as troubled debt restructuring primarily due to the temporary change in payment type from principal and interest to interest only or the lengthening the amortization period of certain loans. Loans categorized as troubled debt restructuring at March 31, 2010 are in compliance with their modified terms, with the exception of one loan amounting to $855,000 that was sixty days past due and seven loans amounting to $4,234,000 that were thirty days past due. The specific allowance of loans categorized as troubled debt restructuring was $1,473,000 and $5,452,000 at March 31, 2010 and December 31, 2009, respectively.

The most significant proportion of the Bank’s non-performing loans continues to be in the land development and commercial real estate construction segments of the Bank’s loan portfolio. These loans comprise 10% of loans and 46% of non accrual loans at March 31, 2010. Management has implemented a strategy to decrease the amount of loans in these segments. These loans have decreased 6% during 2010, while the loan portfolio has declined by 2%.

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

Allowance for Loan Losses.The allowance for loan losses was $30,288,000 at March 31, 2010 compared to $35,125,000 at December 31, 2009, a decrease of $4,837,000 or 14%. The percentage of allowance for loan loss to loans was 3.72%, 4.22% and 2.07% at March 31, 2010, December 31, 2009 and March 31, 2009, respectively. The decline in this ratio and in the allowance for loan losses during the period is due to the recording of net charge-offs of $4,937,000 during the period. However, these loans with charge-offs recorded during the first quarter of 2010 had specific allocations of $4,058,000 in the allowance for loan loss at December 31, 2009. These specific allocations were assigned because many of the charge-offs recorded during the first quarter of 2010 were based on information that was received in 2010 but was relevant to the fair value of the collateral at December 31, 2009. The remaining net charge-offs, which amount to $879,000 were on smaller balance loans that had a reserve for loan losses allocated to the loan based on their respective risk grading at December 31, 2009. As a result of these allocation recognized at December 31, 2009, it was determined no additional provision was needed related to these loans during the first quarter of 2010.

38

A primary factor in the continued decline in the underlying value of our collateral and the decision to recognize these charge-offs was the continuing decline in the first three months of 2010 in the economic environment in Southeastern Michigan. This decline in economic conditions is heavily impacted by conditions and events that have recently impacted the automotive industry, including the recent bankruptcy of two major automotive manufacturers and resulting shut down of production and layoffs of employees. These events have a negative impact on the residential real estate and commercial real estate markets in the Bank’s market area and these loans represent 79% of the Bank’s loan portfolio. These conditions have led to an increase in the Bank’s classified assets during 2010. Management has recognized this trend in our analysis of the allowance for loan losses at March 31, 2010. The allowance for loan losses was based upon management’s assessment of relevant factors, including loan growth, types and amounts of non-performing loans, historical and anticipated loss experience on such types of loans, and current economic conditions. If collateral values continue to decline, additions to the allowance for loan losses will be required and will have an adverse effect on the Corporation’s earnings through increases to the provision for loan losses.

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

	Three Months						Three Months
	Ended			Year Ended			Ended
	03/31/10			12/31/09			03/31/09
Balance, beginning of year	$	35,125		$	14,452		$	14,452
Charge-offs:
Consumer loans		342			1,154			116
Commercial, financial & other		1,521			4,878			1,108
Land development loans — residential property		1,292			9,441			2,881
Land development loans — non residential property		229			4,364			197
Commercial real estate construction ��� residential property		906			1,471			64
Commercial real estate construction — non residential property		36			1,981			176
Commercial real estate mortgages		558			6,919			2,113
Residential real estate mortgages		109			701			25
Recoveries:
Consumer loans		23			176			3
Commercial, financial & other		15			339			105
Land development loans — residential property		9			107			—
Commercial real estate construction — residential property		1			0			—
Commercial real estate mortgages		8			61			25
Residential real estate mortgages		—			36			—
Net charge-offs (recoveries)		4,937			30,190			6,547
Provision for loan losses		100			50,863			10,727
Balance, end of period	$	30,288		$	35,125		$	18,632
Allowance to total loans		3.72	%		4.22	%		2.07	%
Allowance to nonperforming assets		26.56	%		32.30	%		24.96	%
Net charge-offs to average loans		0.60	%		3.40	%		0.71	%

39

Premises and Equipment.Bank premises and equipment at March 31, 2010 were $19,973,000 compared to $20,194,000 at December 31, 2009, a decrease of $221,000 or 1%. The decrease is primarily due to depreciation during the period.

Other Real Estate.Other real estate at March 31, 2010 was $24,467,000 compared to $23,435,000 at December 31, 2009, an increase of $1,032,000 or 4%. The distribution of other real estate by property type is listed below (in thousands):

	Number of
Property Type	Properties		Amount
Single Family Homes		33	$	3,171
Condominium		1		727
Vacant Land		19		10,837
Commercial		7		6,545
Office/Retail		6		3,187
Total		66	$	24,467

Other real estate is comprised of real estate owned of $18,292,000 and real estate in redemption status of $6,175,000. Nine properties with a book value of $5,021,000 are currently generating rental income.

Accrued Interest Receivable.Accrued interest receivable at March 31, 2010 was $3,595,000 compared to $3,562,000 at December 31, 2009, an increase of $33,000 or 1%. The increase was primarily due to increases in the accrued interest receivable on loans.

Other Assets. Other assets at March 31, 2010 were $9,266,000 compared to $12,660,000 at December 31, 2009, a decrease of $3,394,000 or 27%. The decrease was primarily due to the receipt of income tax refunds in the amount of $3,815,000 and $259,000 for the years ended December 31, 2006 and 2007, respectively.

Deposits.Total deposits at March 31, 2010 were $852,017,000 compared to $867,955,000 at December 31, 2009, a decrease of $15,938,000 or 2%. The following is a summary of the distribution of deposits (in thousands):

	03/31/10		12/31/09		03/31/09
Non-interest bearing:
Demand	$	86,407	$	83,873	$	80,624
Interest bearing:
Checking	$	79,566	$	83,087	$	96,491
Money market		57,864		52,412		171,426
Savings		44,992		43,343		56,389
Time, under $100,000		296,370		301,829		215,508
Time, $100,000 and over		286,818		303,411		287,141
		765,610		784,082		826,955
Total deposits	$	852,017	$	867,955	$	907,579

40

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

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

Brokered deposits are included in the Time, $100,000 and over category. Brokered deposits were $8,767,000, $17,544,000 and $65,020,000 at March 31, 2010, December 31, 2009 and March 31, 2009, respectively.

The following is a summary of the distribution of municipal deposits (in thousands):

	03/31/10		12/31/09		03/31/09
Interest bearing checking	$	2,485	$	2,715	$	3,990
Time, $100,000 and over		4,368		4,366		25,015
Total municipal deposits	$	6,853	$	7,081	$	29,005

Federal Home Loan Bank Advances. Federal Home Loan Bank advances were $63,799,000 at March 31, 2010 compared to $63,855,000 at December 31, 2009, a decrease of $56,000. The decrease was due to the scheduled partial repayment of a Federal Home Loan Bank advance.

Accrued Interest Payable. Accrued interest payable at March 31, 2010 was $956,000 compared to $1,046,000 at December 31, 2009, a decrease of $90,000 or 9%. The decrease was primarily due to the decreasing cost of deposits.

Other Liabilities. Other liabilities at March 31, 2010 were $747,000 compared to $1,685,000 at December 31, 2009, a decrease of $938,000 or 56%. The decrease was primarily due to the decrease in accrued liabilities during the period.

Subordinated Debentures. Subordinated debentures were $10,000,000 at March 31, 2010 and December 31, 2009.On December 19, 2002, the Corporation issued $10,000,000 of floating rate obligated mandatory redeemable securities through a special purpose entity as part of a pooled offering. The securities have a term of thirty years. The Corporation may redeem the securities after five years at face value. They are considered to be Tier 1 capital for regulatory capital purposes. Debt issue costs of $300,000 have been entirely amortized. During the third quarter of 2009, the Corporation elected to defer regularly scheduled quarterly interest payments on the Corporation’s subordinated debentures. The terms of the subordinated debentures allow for the deferral of regularly scheduled quarterly interest payments for up to twenty consecutive quarters.

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Capital

Stockholders’ equity at March 31, 2010 was $43,180,000 compared to $41,945,000 as of December 31, 2009, an increase of $1,235,000 or 2%. The increase was due to net income during the period.

The Corporation has experienced large net losses during 2008 and 2009 due to the continued decline in economic conditions in Southeastern Michigan. The recent bankruptcy of two major automotive manufacturers and resulting shut down of production and layoffs of employees have negatively affected the operating results even though the Corporation does not have any direct exposure to the automotive industry. Additionally, economic conditions have continued to erode the value of residential real estate and commercial real estate in the Bank’s market area causing write-downs in the real estate owned portfolio further contributing to net losses.

The regulatory capital ratios of the Corporation’s and the Bank are presented in Note F. Based on the respective regulatory capital ratios, the Bank is considered to be undercapitalized at March 31, 2010 and December 31, 2009. The decline in the Bank’s regulatory capital position has been caused primarily by the losses sustained by the Bank.

The capital ratios disclosed in the middle column of the table in Note F are minimum requirements. Higher capital ratios may be required by federal and state bank regulators if warranted by the particular circumstances or risk profiles of specific institutions.

Applicable federal prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Based on its regulatory capital ratios at March 31, 2010, the Bank is undercapitalized. 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.

Without the prior approval of the FDIC, the Bank is prohibited from paying any dividend, or making any other capital distribution to, the Corporation. The Bank is also forbidden to pay any management fee to the Corporation. These restrictions may materially adversely affect the cash flow of the Corporation.

Any proposed addition of any individual to the board of directors of the Corporation or the Bank, or the proposed employment of any individual as a senior executive officer of either, is subject to 30 days’ prior written notice to, and the absence of disapproval by, the FDIC. Moreover, an application to, and approval by, the FDIC will be required before the Bank may (i) enter into any agreement with any current or former director, officer, employee, or shareholder of the Bank or the Corporation (or any other current or former institution affiliated party of either) for a golden parachute payment or excess nondiscriminatory severance pay plan or arrangement (within the meaning of applicable FDIC regulations), or (ii) make any golden parachute payments or excess nondiscriminatory severance pay plan payments to any such persons.

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In addition, unless consistent with an approved capital restoration plan and accompanied by a proportionate improvement in its capital ratios which will allow it to become adequately capitalized in a reasonable time, the Bank may not permit any increase, from quarter to quarter, in its average total assets. Further, unless the FDIC has approved its capital restoration plan, the Bank is implementing that plan, and the FDIC finds the proposed action is consistent with the plan, the Bank may not, directly or indirectly, acquire any company, depository institution or additional branch office, or engage in any new line of business.

The Bank is also prohibited from accepting funds obtained, directly or indirectly, by or through any deposit broker. Further, the Bank may not accept employee benefit plan deposits.

The Corporation needs to raise sufficient capital during 2010 to return the Bank to well-capitalized status. Management is considering various sources of capital and estimates the need to raise approximately $40 million in capital to be in compliance with its Consent Order with the FDIC and OFIR. Given the current economic environment, there can be no assurance the Corporation will be able to raise the estimated capital needed.

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PART I — FINANCIAL INFORMATION

ITEM 3. — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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 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.

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

The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at March 31, 2010, 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	$	57		$	—		$	—		$	—	$	57
Interest bearing deposits with Banks		70,898			—			—			—		70,898
Mortgage loans held for sale		758			—			—			—		758
Securities available for sale		—			—			46,267			—		46,267
Federal Home Loan Bank stock		3,698			—			—			—		3,698
Total loans, net of non-accrual		149,286			96,660			454,115			32,737		732,798
Total earning assets		224,697			96,660			500,382			32,737		854,476
Interest bearing liabilities
Total interest bearing deposits		332,717			302,634			129,991			268		765,610
Federal Home Loan Bank advances		34,000			19,584			10,215			—		63,799
Other Borrowings		—			—			—			—		—
Subordinated debentures		10,000			—			—			—		10,000
Total interest bearing liabilities		376,717			322,218			140,206			268		839,409
Net asset (liability) funding gap		(152,020	)		(225,558	)		360,176			32,469	$	15,067
Cumulative net asset (liability) funding gap		($152,020	)		($377,578	)		($17,402	)	$	15,067

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

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

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

The Corporation is currently considering other alternatives to further supplement holding company liquidity, which has decreased primarily due to the Corporation’s repurchase of common stock. One alternative that is being considered is the financing or sale/leaseback of two office buildings that are owned by the Corporation. A decision on the financing or sale/leaseback of the two office buildings that are owned by the Corporation has not been reached at this time.

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The following tables provide information about the Bank’s contractual obligations and commitments at March 31, 2010 (in thousands):

Contractual Obligations

	Payments Due By Period
	Less Than				3-5		Over 5
	1 Year		1-3 Years		Years		Years		Total
Certificates of deposit	$	452,930	$	128,699	$	1,291	$	268	$	583,188
Long-term borrowings		53,584		10,215		—		—		63,799
Lease commitments		702		706		334		—		1,742
Subordinated debentures		—		—		—		10,000		10,000
Totals	$	507,216	$	139,620	$	1,625	$	10,268	$	658,729

Unused Loan Commitments and Letters of Credit

	Amount Of Commitment Expiration Per Period
	Less Than				3-5		Over 5
	1 Year		1-3 Years		Years		Years		Total
Unused loan commitments	$	39,279	$	8,466	$	7,120	$	8,384	$	63,249
Standby letters of credit		877		1,500		—		—		2,377
Totals	$	40,156	$	9,966	$	7,120	$	8,384	$	65,626

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Item 4.Controls and Procedures

Disclosure Controls and Procedures—As of the end of the period covered by this report, the registrant carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures. Based on the review of the disclosure controls of the registrant, the Chief Executive Officer and the Chief Financial Officer have concluded that the registrant’s disclosure controls and procedures were effective as of March 31, 2010.

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

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

PART II — OTHER INFORMATION

ITEM 6. EXHIBITS

Exhibit 31.1	CEO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2	CFO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1	CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2	CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

SIGNATURES

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

Dearborn Bancorp, Inc.
(Registrant)
 

/s/ John E. Demmer  

John E. Demmer 

Chairman 

/s/ Michael J. Ross  

Michael J. Ross 

President and Chief Executive Officer 

/s/ Jeffrey L. Karafa  

Jeffrey L. Karafa 

Treasurer and Chief Financial Officer 

Date: May 14, 2010

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

Exhibit Index

Exhibit	Description
31.1	CEO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	CFO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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