Dearborn Bancorp (DEAR) 10-Q 2004 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly period ended September 30, 2004.

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)

N/A
(Former name, former address and former fiscal year, if changed since last report)

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.

     Yes      X          No           

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of October 31, 2004.

Class	Shares Outstanding
Common Stock		4,545,210

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the 1934 Securities and Exchange Act).

     Yes                No      X     

DEARBORN BANCORP, INC.
INDEX

			Page
Part I.		Financial Information:
Item 1.		Financial Statements
		The following consolidated financial statements of Dearborn Bancorp, Inc. and its subsidiary included in this report are:
		Independent Accountants’ Report		3
		Consolidated Balance Sheets — September 30, 2004, December 31, 2003 and September 30, 2003		4
		Consolidated Statements of Income — For the Three and Nine Months Ended September 30, 2004 and 2003		5
		Consolidated Statements of Comprehensive Income — For the Three and Nine Months Ended September 30, 2004 and 2003		6
		Consolidated Statements of Cash Flows — For the Nine Months Ended September 30, 2004 and 2003		7
		Notes to Consolidated Financial Statements		8 - 11
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital		12 - 26
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		27 - 29
Item 4.		Controls and Procedures		30
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 and Reports on Form 8-K		31
	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 2. Changes in 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				32
Certification of Chief Executive Officer Pursuant to Section 302
Certification of Chief Financial Officer Pursuant to Section 302
Certifications Pursuant to Section 906
Certifications Pursuant to Section 906

2

REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Dearborn Bancorp, Inc.
Dearborn, Michigan

We have reviewed the consolidated balance sheets of Dearborn Bancorp, Inc. as of September 30, 2004 and 2003, the related consolidated statements of income and comprehensive income for the three and nine month periods then ended, and the related consolidated statements of cash flows for the nine month periods then ended. These financial statements are the responsibility of the Corporation’s management.

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

/s/ Crowe Chizek and Company LLC  

Grand Rapids, Michigan
October 25, 2004

3

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (unaudited)

(Dollars, in thousands)
	9/30/04			12/31/03			9/30/03
ASSETS
Cash and cash equivalents
Cash and due from banks	$	6,343		$	5,172		$	6,182
Federal funds sold		11,636			7,651			7,384
Interest bearing deposits with banks		29,600			8,325			128
Total cash and cash equivalents		47,579			21,148			13,694
Mortgage loans held for sale		1,533			1,505			2,727
Investment securities, available for sale		39,516			16,948			11,933
Federal Home Loan Bank stock		1,111			1,073			1,060
Loans
Loans		474,111			400,958			374,963
Allowance for loan loss		(5,188	)		(4,314	)		(4,016	)
Net loans		468,923			396,644			370,947
Premises and equipment, net		10,987			5,554			5,586
Real estate owned		357			—			—
Accrued interest receivable		1,648			1,461			1,377
Other assets		2,439			1,742			1,963
Total assets	$	574,093		$	446,075		$	409,287
LIABILITIES
Deposits
Non-interest bearing deposits	$	45,136		$	39,081		$	36,032
Interest bearing deposits		423,878			340,538			307,793
Total deposits		469,014			379,619			343,825
Other liabilities
Federal Home Loan Bank advances		20,614			20,638			20,638
Other liabilities		1,140			463			726
Accrued interest payable		928			754			651
Subordinated debentures		10,000			10,000			10,000
Total liabilities		501,696			411,474			375,840
STOCKHOLDERS’ EQUITY
Common stock — 5,000,000 shares authorized, 4,538,958 shares at 09/30/04, 3,089,567 shares at 12/31/02; and 3,083,460 shares at 09/30/03		71,370			34,451			32,379
Retained earnings		1,590			128			1,037
Accumulated other comprehensive loss		(563	)		22			31
Total stockholders’ equity		72,397			34,601			33,447
Total liabilities and stockholders’ equity	$	574,093		$	446,075		$	409,287

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

4

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(In thousands, except share and per share data)	Three Months Ended					Nine Months Ended
	09/30/04			09/30/03		09/30/04			09/30/03
Interest income
Interest on loans, including fees	$	7,142		$	6,035	$	20,296		$	16,487
Interest on securities, available for sale		155			62		293			450
Interest on federal funds		49			18		87			97
Interest on deposits with banks		80			1		97			131
Total interest income		7,426			6,116		20,773			17,165
Interest expense
Interest on deposits		2,080			1,613		5,443			5,456
Interest on other borrowings		234			235		696			695
Interest on subordinated debentures		109			123		332			368
Total interest expense		2,423			1,971		6,471			6,519
Net interest income		5,003			4,145		14,302			10,646
Provision for loan losses		369			671		874			1,410
Net interest income after provision for loan		4,634			3,474		13,428			9,236
Non-interest income
Service charges on deposit accounts		141			117		409			330
Fees for other services to customers		(10	)		7		24			22
Gain on the sale of loans		119			605		493			1,906
Gain on the sale of investment securities		—			10		—			89
Loss on the sale of real estate		—			—		(3	)		—
Other income		(4	)		33		48			82
Total non-interest income		246			772		971			2,429
Non-interest expenses
Salaries and employee benefits		1,868			1,534		5,537			4,579
Commissions on the origination of loans		52			253		202			814
Occupancy and equipment expense		322			369		1,046			1,040
Advertising and marketing		66			64		223			208
Stationery and supplies		81			82		225			267
Professional services		67			68		281			280
Data processing		82			86		229			241
Other operating expenses		217			265		651			684
Total non-interest expenses		2,755			2,721		8,394			8,113
Income before income tax provision		2,125			1,525		6,005			3,552
Income tax provision		723			515		2,039			1,203
Net income	$	1,402		$	1,010	$	3,966		$	2,349
Per share data:
Net income — basic	$	0.34		$	0.33	$	1.15		$	0.77
Net income — diluted	$	0.31		$	0.30	$	1.04		$	0.70
Weighted average number of shares outstanding — basic		4,158,113			3,074,513		3,463,636			3,054,181
Weighted average number of shares outstanding — diluted		4,502,741			3,371,891		3,801,828			3,349,608

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

5

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(In thousands)	Three Months Ended						Nine Months Ended
	09/30/04			09/30/03			09/30/04			09/30/03
Net income	$	1,402		$	1,010		$	3,966		$	2,349
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during period		(552	)		(6	)		(886	)		14
Less: reclassification adjustment for gains included in net income		—			(10	)		—			(89	)
Tax effects		187			6			301			27
Other comprehensive loss		(365	)		(10	)		(585	)		(48	)
Comprehensive income	$	1,037		$	1,000		$	3,381		$	2,301

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

6

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands)	Nine Months Ended
	9/30/04			9/30/03
Cash flows from operating activities
Interest and fees received	$	20,447		$	17,048
Interest paid		(5,965	)		(6,477	)
Taxes paid		(1,500	)		(1,825	)
Proceeds from sale of mortgages held for sale		32,667			129,111
Origination of mortgages held for sale		(32,343	)		(120,080	)
Cash paid to suppliers and employees		(8,243	)		(7,446	)
Net cash provided by operating activities		5,063			10,331
Cash flows from investing activities
Proceeds from maturities of securities available for sale		11,000			19,575
Proceeds from call of securities available for sale		325			—
Proceeds from sales of securities available for sale		5,884			6,089
Proceeds from repayments of securities available for sale		326			882
Purchases of securities available for sale		(40,949	)		(16,412	)
Purchases of Federal Home Loan Bank stock		(38	)		(27	)
Increase in loans, net of payments received		(73,153	)		(107,709	)
Purchases of property and equipment		(5,812	)		(657	)
Net cash used in investing activities		(102,417	)		(98,259	)
Cash flows from financing activities
Net increase in non-interest bearing deposits		6,055			3,575
Net increase in interest bearing deposits		83,340			78,164
Repayments of Federal Home Loan Bank advances		(24	)		(22	)
Issuance of common stock		34,038			—
Stock option exercise		376			455
Net cash provided by financing activities		123,785			82,172
Increase (decrease) in cash and cash equivalents		26,431			(5,756	)
Cash and cash equivalents at the beginning of the period		21,148			19,450
Cash and cash equivalents at the end of the period	$	47,579		$	13,694
Reconciliation of net income to net cash used in operating activities
Net income	$	3,966		$	2,349
Adjustments to reconcile net income to net cash used in operating activities
Provision for loan losses		874			1,410
Depreciation and amortization expense		379			347
Accretion of discount on investment securities		(53	)		(6	)
Amortization of premium on investment securities		12			169
Gain on the sale of securities, available for sale		—			(89	)
(Increase) decrease in mortgages held for sale		(28	)		7,125
Increase in interest receivable		(187	)		(117	)
Increase in interest payable		174			42
Increase in other assets		(751	)		(571	)
Increase (decrease) in other liabilities		677			(328	)
Net cash provided by operating activities	$	5,063		$	10,331
The accompanying notes are an integral part of these consolidated statements.

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. Accounting and Reporting Policies

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

The consolidated financial statements of the Corporation as of September 30, 2004 and 2003, and December 31, 2003 and for the three and nine month periods ended September 30, 2004 and 2003 reflect all adjustments, consisting of normal recurring items which are in the opinion of management, necessary for a fair presentation of the results for the interim period. The operating results for the quarter are not necessarily indicative of results of operations for the entire year.

The consolidated financial statements as of September 30, 2004 and 2003, and for the three and nine month periods ended September 30, 2004 and 2003 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 generally accepted accounting principles 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 2003 Annual Report to Stockholders on Form 10-K.

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

8

A. Accounting and Reporting Policies (continued)

Employee compensation expense under stock option plans is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-based Compensation (in thousands, except share and per share data).

	Three Months Ended				Nine Months Ended
	09/30/04		09/30/03		09/30/04		09/30/03
Net income
As reported	$	1,402	$	1,010	$	3,966	$	2,349
Less: stock-based compensation expense determined under fair value based method		—	$	59		9		801
Pro forma	$	1,402	$	951	$	3,957	$	1,548
Basic income per share
As reported	$	0.34	$	0.33	$	1.15	$	0.77
Pro forma	$	0.34	$	0.31	$	1.14	$	0.51
Diluted income per share
As reported	$	0.31	$	0.30	$	1.04	$	0.70
Pro forma	$	0.31	$	0.28	$	1.04	$	0.47

Stock options vest after a six month period from date of grant. No options were granted in 2004. The pro forma effects are computed using option pricing models and the assumptions for the 2003 grants were a risk-free interest rate of 3.55%, expected life of seven years, and expected volatility of 25.55%.

9

B. Securities Available For Sale

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

	September 30, 2004
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
Mortgage backed securities	$	870	$	25	$	—		$	895
Corporate debt securities		17,854		1		—			17,855
Government agency securities		17,645		1		—			17,646
FHLMC preferred stock		4,000		—		(880	)		3,120
Totals	$	40,369	$	27		($880	)	$	39,516

	December 31, 2003
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
US Treasury securities	$	2,011	$	2	$	—	$	2,013
Mortgage backed securities		1,194		31		—		1,225
Corporate debt securities		9,710		—		—		9,710
FHLMC preferred stock		4,000		—		—		4,000
Totals	$	16,915	$	33	$	—	$	16,948

The amortized cost and estimated market value of securities available for sale at September 30, 2004 by contractual maturity are shown below (in thousands):

			Estimated
	Amortized		Market
	Cost		Value
Due in over ten years	$	17,854	$	17,855
Mortgage backed securities		870		895
Government agency securities		17,645		17,646
FHLMC preferred stock		4,000		3,120
Totals	$	40,369	$	39,516

The entire portfolio has a net unrealized loss of $853,000 at September 30, 2004. The Bank holds a floating rate issue of preferred stock of the Federal Home Loan Mortgage Corporation that has an unrealized loss of $880,000. This unrealized loss is primarily caused by the floating rate characteristic of this security and its market value is expected to improve as interest rates rise. The Corporation does not expect to realize a loss as a result of holding this security. The Corporation does not hold any securities in the “Held to Maturity” category nor does the Corporation hold or utilize derivatives.

10

C. Stock Option Plan

Options to buy common stock are granted to officers and employees under a Stock Option Plan which provides for issue of up to 747,790 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. If an option expires or terminates without having been exercised, such option becomes available for future grant under the Plan.

A summary of the option activity for the nine months ended September 30, 2004 is as follows:

						Weighted
	Available					Average
	For		Options			Exercise
	Grant		Outstanding			Price
Outstanding at January 1, 2004		—		590,957		$	9.48
Granted		—		—			—
Exercised		—		(48,525	)		7.75
Outstanding at September 30, 2004		—		542,432		$	9.63

For the options outstanding at September 30, 2004, the range of exercise prices was $4.84 to $18.69 per share with a weighted-average remaining contractual term of 6.3 years. At September 30, 2004, 542,432 options were exercisable at weighted average exercise price of $9.63 per share. Stock options for 4,631 shares of common stock were not considered in computing diluted earnings per share for the nine months ended September 30, 2003 because they were antidilutive. There were no antidilutive shares for the nine months ended September 30, 2004.

11

PART I — FINANCIAL INFORMATION

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 that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Corporation and Bank. Words such as “anticipates”, “believes”, “estimates”, “expects”, “forecasts”, “intends”, “is likely”, “plans”, “projects”, variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. The Corporation undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise.

Future Factors include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national and local economy. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

12

General

The Corporation was formed in 1992 and the Bank was formed in 1993. Subsequently, the Bank has opened offices in several communities in Southeastern Michigan. The date opened, branch location and branch type of each branch is listed below:

Date Opened	Location	Type of office
February 1994	22290 Michigan Avenue Dearborn, Michigan 48123	Full service retail branch with ATM Regional lending center
December 1995	24935 West Warren Avenue Dearborn Heights, Michigan 48127	Full service retail branch
August 1997	44623 Five Mile Road Plymouth, Michigan 48170	Full service retail branch with ATM
May 2001	1325 North Canton Center Road Canton, Michigan 48187	Full service retail branch with ATM
December 2001	45000 River Ridge Drive Clinton Township, Michigan 48038	Regional lending center
November 2002	19100 Hall Road Clinton Township, Michigan 48038	Full service retail branch with ATM
February 2003	12820 Fort Street Southgate, Michigan 48195	Full service retail branch with ATM
May 2003	3201 University Drive, Suite 180 Auburn Hills, Michigan 48326	Full service retail branch
October 2004	450 East Michigan Avenue Saline, Michigan 48176	Full service retail branch with ATM
October 2004	2180 West Stadium Boulevard Ann Arbor, Michigan 48103	Full service retail branch with ATM
October 2004	250 West Eisenhower, Suite 100 Ann Arbor, Michigan 48103	Regional lending center

The Bank has also formed three 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
May 2001	Community Bank Mortgage, Inc.	Origination of commercial and residential mortgage loans
March 2002	Community Bank Audit Services, Inc.	Internal auditing and compliance services for financial institutions

13

Recent Developments

Acquisition of Bank of Washtenaw.On October 29, 2004, the Corporation acquired the Bank of Washtenaw (“Washtenaw”), a wholly owned subsidiary of Pavillion Bancorp, Inc. for $15,100,000 in cash. Washtenaw, which was founded in January 2001, has its main office in Saline, Michigan with a branch office and a regional lending center in Ann Arbor, Michigan. As of September 30, 2004, Washtenaw had total assets of $72,147,000, gross loans of $68,406,000 and total deposits of $64,828,000. Management has not completed the determination of the fair values of the assets acquired and liabilities assumed or the identification of amortizable intangibles and goodwill.

The following table presents pro forma information for the Corporation including the acquisition of Bank of Washtenaw for the nine months ended September 30, 2004 and 2003, as if the acquisition had occurred at the beginning of 2004 and 2003. The pro forma financial information does not include adjustments for the amortization of intangibles arising from the transaction as this analysis has not yet been completed. The pro forma is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed dates.

(In thousands, except share and per share data)	Nine Months Ended
	9/30/04		9/30/03
Interest income	$	23,895	$	20,102
Interest expense		7,419		7,520
Net interest income		16,476		12,582
Provision for loan loss		893		1,574
Net interest income after provision for loan losses		15,583		11,008
Non-interest income		1,190		2,788
Non-interest expense		10,172		10,125
Income before income tax provision		6,601		3,671
Income tax provision		2,337		1,339
Net income	$	4,264	$	2,332
Basic earnings per share	$	1.23	$	0.76
Diluted earnings per share	$	1.12	$	0.70

14

Results of Operations

The Corporation reported net income of $1,402,000 and $3,966,000 for the three and nine month periods ended September 30, 2004, compared to net income of $1,010,000 and $2,349,000 for the three month and nine month periods ended September 30, 2003. The increase in net income was primarily due to the improvement in net interest income. The increase in net interest income was partially offset by the decrease in non-interest income. The improvement in net interest income was primarily due to the increase in the commercial real estate loan and other commercial loan portfolios and the decreasing cost of deposits during the period. The increase in loans was partially funded with short term investments such as interest bearing deposits with banks, federal funds sold and floating rate securities, which carry a lower yield than loans.

Net Interest Income

2004 Compared to 2003.As noted on the two charts on the following pages, net interest income for the three and nine month periods ended September 30, 2004 was $5,003,000 and $14,302,000, compared to $4,145,000 and $10,646,000 for the same periods ended September 30, 2003, an increase of $858,000 or 21% and $3,656,000 or 34%, respectively. This increase was caused primarily by the increasing volume of interest earning assets and interest bearing liabilities and the net interest rate spread between these assets and liabilities. The Corporation’s interest rate spread was 3.43% and 3.73% for the three and nine month periods ended September 30, 2004, compared to 4.17% and 3.61% for the same periods in 2003. The Corporation’s interest rate margin was 3.82% and 4.05% for the three and nine month periods ended September 30, 2004, compared to 4.47% and 3.96% for the same periods in 2003. The net interest rate spread and net interest margin declined for the three months ended September 30, 2004 due to elevated levels of interest bearing deposits with bank, federal funds sold and investment securities, available for sale during the period. Management expects the net interest rate spread and net interest margin will improve as the funds currently invested in these short term assets are deployed into loans. The increase in the net interest rate spread and the net interest margin for the nine months ended September 30, 2004 was primarily due to the increase in loans and the decreasing cost of interest bearing liabilities.

15

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

	Three months ended							Three months ended
	September 30, 2004							September 30, 2003
	Average				Average			Average				Average
(In thousands)	Balance		Interest		Rate			Balance		Interest		Rate
Assets
Interest-bearing deposits with banks	$	21,945	$	80		1.45	%	$	434	$	1		0.92	%
Federal funds sold		12,160		49		1.60	%		8,359		18		0.86	%
Investment securities, available for sale		32,214		155		1.91	%		14,806		62		1.67	%
Loans		454,652		7,142		6.25	%		345,053		6,035		6.96	%
Sub-total earning assets		520,971		7,426		5.67	%		368,652		6,116		6.60	%
Other assets		18,235							24,089
Total assets	$	539,206						$	392,741
Liabilities and stockholders’ equity
Interest bearing deposits	$	400,265	$	2,080		2.07	%	$	291,597	$	1,613		2.20	%
Other borrowings		30,634		343		4.45	%		30,657		358		4.65	%
Sub-total interest bearing liabilities		430,899		2,423		2.24	%		322,254		1,971		2.43	%
Non-interest bearing deposits		43,553							35,598
Other liabilities		1,711							1,530
Stockholders’ equity		63,043							33,188
Total liabilities and stockholders’ equity	$	539,206						$	392,741
Net interest income			$	5,003						$	4,145
Net interest rate spread						3.43	%						4.17	%
Net interest margin on earning assets						3.82	%						4.47	%

16

	Nine months ended							Nine months ended
	September 30, 2004							September 30, 2003
	Average				Average			Average				Average
(In thousands)	Balance		Interest		Rate			Balance		Interest		Rate
Assets
Interest-bearing deposits with banks	$	9,842	$	97		1.32	%	$	14,707	$	131		1.19	%
Federal funds sold		9,511		87		1.22	%		11,841		97		1.10	%
Investment securities, available for sale		20,978		293		1.87	%		23,085		450		2.61	%
Loans		431,617		20,296		6.28	%		311,112		16,487		7.10	%
Sub-total earning assets		471,948		20,773		5.88	%		360,745		17,165		6.38	%
Other assets		16,929							23,206
Total assets	$	488,877						$	383,951
Liabilities and stockholders’ equity
Interest bearing deposits	$	371,193	$	5,443		1.96	%	$	284,667	$	5,456		2.57	%
Other borrowings		30,636		1,028		4.48	%		30,659		1,063		4.65	%
Sub-total interest bearing liabilities		401,829		6,471		2.15	%		315,326		6,519		2.77	%
Non-interest bearing deposits		40,559							34,978
Other liabilities		1,229							1,523
Stockholders’ equity		45,260							32,124
Total liabilities and stockholders’ equity	$	488,877						$	383,951
Net interest income			$	14,302						$	10,646
Net interest rate spread						3.73	%						3.61	%
Net interest margin on earning assets						4.05	%						3.96	%

17

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.

	Three Months Ended								Nine Months Ended
	September 30, 2004/2003								September 30, 2004/2003
	Change in Interest Due to:								Change in Interest Due to:
	Average		Average			Net			Average			Average			Net
(In thousands)	Balance		Rate			Change			Balance			Rate			Change
Assets
Interest bearing deposits with banks	$	78	$	1		$	79			($43	)	$	9			($34	)
Federal funds sold		15		16			31			(17	)		7			(10	)
Investment securities, available for sale		84		9			93			(74	)		(83	)		(157	)
Loans		1,718		(611	)		1,107			5,082			(1,273	)		3,809
Total earning assets	$	1,895		($585	)	$	1,310		$	4,947			($1,339	)	$	3,608
Liabilities
Interest bearing deposits	$	564		($97	)	$	467		$	857			($870	)		($13	)
Other borrowings		—		(15	)		(15	)		—			(35	)		(35	)
Total interest bearing liabilities	$	564		($112	)	$	452		$	857			($905	)		($48	)
Net interest income						$	858								$	3,656
Net interest rate spread							(0.73	%)								0.12	%
Net interest margin on earning assets							(0.65	%)								0.09	%

Provision for Loan Losses

2004 Compared to 2003.The provision for loan losses was $369,000 and $874,000 for the three and nine month periods ended September 30, 2004, compared to $671,000 and $1,410,000 for the same periods in 2003, a decrease of $302,000 or 45% for the three month period and $536,000 or 38% for the nine month period. The decrease is primarily due to the decrease in net charge-offs during the nine months ended September 30, 2004 compared to the nine month period ended September 30, 2003. The provision for loan losses for the three and nine month periods ended September 30, 2004 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 and anticipated loss experience on such types of loans, and current economic conditions.

18

Non-interest Income

2004 Compared to 2003.Non-interest income was $246,000 and $971,000 for the three and nine month periods ended September 30, 2004, compared to $772,000 and $2,429,000 for the same periods in 2003, a decrease of $526,000 or 68% for the three month period and $1,458,000 or 60% for the nine month period. The decrease was primarily due to the decrease in the gain on the sale of loans during the period. The volume of mortgage loans sold decreased during the period as a result of increased interest rates and a decrease in the size of the mortgage origination staff. Management expects the gain on sale of loans to continue at current levels during 2004.

Non-interest Expense

2004 Compared to 2003.Non-interest expense was $2,755,000 and $8,394,000 for the three and nine month periods ended September 30, 2004, compared to $2,721,000 and $8,113,000 for the same periods in 2003, an increase of $34,000 or 1% for the three month period and $281,000 or 3% for the nine month period. The largest component of non-interest expense was salaries and employee benefits which amounted to $1,868,000 and $5,537,000 for the three and nine month periods ended September 30, 2004, compared to $1,534,000 and $4,579,000 for the same periods in 2003, an increase of $334,000 or 22% for the three month period and $958,000 or 21% for the six month period. The primary factors for the increase in salaries and benefits expense was the expansion of the commercial lending, retail administration and operations departments. As of September 30, 2004, the number of full time equivalent employees was 119 compared to 112 as of September 30, 2003. Salaries and employee benefits will continue to increase due to the acquisition of the Bank of Washtenaw and general staff increases.

Commissions on the origination of loans amounted to $52,000 and $202,000 for the three and nine month periods ended September 30, 2004, compared to $253,000 and $814,000 for the same periods in 2003, a decrease of $201,000 or 79% for the three month period and $612,000 or 75% for the nine month period. The primary reason for the decrease in the commissions on the origination of loans was the decrease in the volume of loans originated during the period. Management expects the commissions paid on the origination of loans to continue at current levels during 2004.

The second largest component of non-interest expense was occupancy and equipment expense. Occupancy and equipment expense amounted to $322,000 for the three month period ended September 30, 2004, compared to $369,000 for the same period in 2003, a decrease of $47,000 or 13% for the three month period. Occupancy and equipment expense amounted to $1,046,000 for the nine month period ended September 30, 2004, compared to $1,040,000 for the same period in 2003, an increase of $6,000 or 1% for the three month period.

Income Tax Provision

2004 Compared to 2003.The income tax expense was $723,000 and $2,039,000 for the three and nine month periods ended September 30, 2004, compared to $515,000 and $1,203,000 for the same periods in 2003, an increase of $208,000 or 40% for the three month period and $836,000 or 69% for the nine month period. The increase was primarily a result of increased pre-tax income.

19

Comparison of Financial Condition at September 30, 2004 and December 31, 2003

Assets.Total assets at September 30, 2004 were $574,093,000 compared to $446,075,000 at December 31, 2003, an increase of $128,018,000 or 29%. The increase was primarily due to the increase in loans, securities, available for sale, federal funds sold and interest bearing deposits with banks during the period.

Federal Funds Sold.Total federal funds sold at September 30, 2004 were $11,636,000 compared to $7,651,000 at December 31, 2003, an increase of $3,985,000 or 52%. The increase was primarily due to the short term deployment of funds that were received as a result of an increase in deposits. Available funds are deployed into federal funds sold until they can be utilized to fund loan volume.

Interest bearing deposits with banks.Total interest bearing deposits with banks at September 30, 2004 were $29,600,000 compared to $8,325,000 at December 31, 2003, an increase of $21,275,000 or 256%. This investment was established to provide the Corporation with an alternate short term investment option. This short term investment is a variable-rate certificate of deposit with the Federal Home Loan Bank of Indianapolis that carries a similar rate of return to federal funds sold. Available funds are deployed into interest bearing deposits with banks until they can be utilized to fund loan volume.

Mortgage Loans Held for Sale.Total mortgage loans held for sale at September 30, 2004 were $1,533,000 compared to $1,505,000 at December 31, 2003, an increase of $28,000 or 2%. This increase was a result of the increase 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 September 30, 2004 were $39,516,000 compared to $16,948,000 at December 31, 2003, an increase of $22,568,000 or 133%. The increase was due to investment of funds received from the sale of common stock on July 23, 2004. These funds will be invested in securities, available for sale until they need to be deployed to the Bank in anticipation for future growth or utilized for other general corporate purposes.

Please refer to Note B of the Notes to Consolidated Financial Statements for the amortized cost and estimated market value of securities, available for sale.

Federal Home Loan Bank Stock.Federal Home Loan Bank stock was valued at $1,111,000 at September 30, 2004, compared to $1,073,000 at December 31, 2003, an increase of $38,000 or 4%.

20

Loans.Total loans at September 30, 2004 were $474,111,000 compared to $400,958,000 at December 31, 2003, an increase of $73,153,000 or 18%. The increase was primarily due to the continued expansion of the commercial lending department during the past twelve months. This expansion included the addition of two experienced loan officers during the last twelve months. Major categories of loans included in the loan portfolio are as follows (in thousands):

	09/30/04			12/31/03			09/30/03
Consumer loans	$	27,199		$	25,200		$	23,476
Commercial, financial & other		87,912			68,922			64,969
Commercial real estate construction		57,098			50,087			46,872
Commercial real estate mortgages		255,378			208,305			196,798
Residential real estate mortgages		46,524			48,444			42,848
		474,111			400,958			374,963
Allowance for loan losses		(5,188	)		(4,314	)		(4,016	)
	$	468,923		$	396,644		$	370,947

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

	09/30/04		12/31/03		09/30/03
Over 90 days past due and still accruing	$	4	$	19	$	241
Non-accrual loans		1,542		2,056		2,103
Other real estate owned		357		—		—
	$	1,903	$	2,075	$	2,344

Non-accrual loans at September 30, 2004 were $1,542,000, of which, $791,000 was related to one commercial loan relationship that is well secured. The remaining non-accrual loans consisted of one slow-paying home equity loan with a balance of $28,000, one slow-paying construction loan with a balance of $525,000 and two well-secured residential mortgage loans with balances of $82,000 and $116,000.

Allowance for Loan Losses.The allowance for loan losses was $5,188,000 at September 30, 2004 compared to $4,314,000 at December 31, 2003, an increase of $874,000 or 20%. The increase resulted from provisions for loan losses recorded during the nine months ended September 30, 2004 and a net recovery of $1,000 during the nine months ended September 30, 2004 and responds to the growth of the loan portfolio as well as the mix of loans and levels of nonperforming loans. 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.

21

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

	Nine Months						Nine Months
	Ended			Year Ended			Ended
	09/30/04			12/31/03			09/30/03
Balance, beginning of year	$	4,314		$	2,875		$	2,875
Charge-offs:
Consumer loans		19			38			38
Commercial, financial & other		—			141			139
Commercial real estate construction		—			50			50
Commercial real estate mortgages		—			124			70
Residential real estate mortgages		94			—			—
Recoveries:
Consumer loans		12			13			11
Commercial, financial & other		41			30			17
Commercial real estate construction		—			50			—
Commercial real estate mortgages		61			—			—
Residential real estate mortgages		—			—			—
Net charge-offs		(1	)		260			269
Additions charged to operations		873			1,699			1,410
Balance, end of period	$	5,188		$	4,314		$	4,016
Allowance to total loans		1.09	%		1.08	%		1.07	%
Allowance to nonperforming assets		272.67	%		207.90	%		172.27	%
Net charge-offs to average loans		0.00	%		0.08	%		0.08	%

Premises and Equipment.Bank premises and equipment at September 30, 2004 was $10,987,000 compared to $5,554,000 at December 31, 2003, an increase of $5,433,000 or 98 %. The increase in premises and equipment was primarily due to the purchase and renovation of the Bank’s operation center in Allen Park, Michigan and the Bank’s administrative center in Dearborn, Michigan. The operations center will house the Bank’s accounting, data operations, mortgage operations, product support, compliance and audit functions. The Bank’s executive, commercial lending and human resources functions will be located within the administrative center. Both facilities will be occupied during the fourth quarter of 2004.

22

Real Estate Owned.Real estate owned at September 30, 2004 was $357,000 compared to $0 at December 31, 2003. The increase was due to the Bank’s foreclosure of one commercial loan, which was collateralized by three residential properties and one residential mortgage loan. The book values and appraised values of the real estate owned are as follows:

		ESTIMATED
	POSSESSION	MARKET		BOOK
PROPERTY ADDRESS	DATE	VALUE		VALUE
Residential House Hazel Park, MI	05/19/04		95,000
Residential Condominium Madison Heights, MI	04/28/04		92,000
Residential Condominium Madison Heights, MI	04/28/04		90,000
			277,000		207,395
Residential House Spring Arbor, MI	07/01/04		150,000		150,000
Total real estate owned		$	427,000	$	357,395

Accrued Interest Receivable.Accrued interest receivable at September 30, 2004 was $1,648,000 compared to $1,461,000 at December 31, 2003, an increase of $187,000 or 13%. The increase was primarily due to the increase in loans.

Other Assets. Other assets at September 30, 2004 were $2,439,000 compared to $1,742,000 at December 31, 2003, an increase of $697,000 or 40%. The increase was primarily due to changes in deferred tax assets.

23

Deposits.Total deposits at September 30, 2004 were $469,014,000 compared to $379,619,000 at December 31, 2003, an increase of $89,395,000 or 24%. The following is a summary of the distribution of deposits (in thousands):

	09/30/04		12/31/03		09/30/03
Non-interest bearing:
Demand	$	45,136	$	39,081	$	36,032
Interest bearing:
Checking	$	14,988	$	24,069	$	22,107
Money market		34,336		10,998		11,958
Savings		91,611		126,596		116,862
Time, under $100,000		99,620		65,120		65,402
Time, $100,000 and over		183,323		113,755		91,464
		423,878		340,538		307,793
Total deposits	$	469,014	$	379,619	$	343,825

Management continues to implement a strategy to change the mix of the deposit portfolio by focusing more heavily on savings and institutional deposits. The increase in deposits was primarily due to normal business development, marketing, telemarketing, referral programs and growth strategies which included a promotion that celebrated the Bank’s 10th Anniversary during March 2004, which targeted time deposit growth. Management expects deposits to continue to grow at a similar rate during the remainder of 2004.

The Bank has enacted a strategy to utilize public funds to a higher degree. The Bank will also utilize brokered deposits. The Bank has designated a public funds officer to coordinate and manage these efforts. Public funds consist of interest checking and time deposits of local governmental units. They are the result of strong relationships between the Bank and the communities in the Bank’s marketing area and are considered by the Bank to be core deposits. The following is a summary of the distribution of municipal deposits (in thousands):

	09/30/04		12/31/03		09/30/03
Interest bearing checking	$	5,047	$	14,419	$	12,642
Time, $100,000 and over		77,044		46,580		29,935
Total municipal deposits	$	82,091	$	60,999	$	42,577

Brokered deposits are included in the Time, $100,000 and over category. Brokered deposits were $14,190,000, $1,330,000 and $100,000 at September 30, 2004, December 31, 2003 and September 30, 2003, respectively.

24

Federal Home Loan Bank Advances. Federal Home Loan Bank advances at September 30, 2004 were $20,614,000 compared to $20,638,000 at December 31, 2003, a decrease of $24,000 or 0%. This decrease was due to a scheduled principal payment on one Federal Home Loan Bank advance.

Other Liabilities. Other liabilities at September 30, 2004 were $1,140,000 compared to $463,000 at December 31, 2003, an increase of $677,000 or 146%. The increase was primarily due to the increase in expenses payable during the period.

Accrued Interest Payable. Accrued interest payable at September 30, 2004 was $928,000 compared to $754,000 at December 31, 2003, an increase of $174,000 or 23%. The increase was primarily due to the increasing amount of interest bearing deposits during the period.

Subordinated Debentures. Subordinated debentures were $10,000,000 at September 30, 2004 and December 31, 2003.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. The funds from the issue of these securities were invested into the Bank to allow for additional growth. Debt issue costs of $300,000 have been capitalized and are being amortized over the term of the securities. Unamortized debt issuance costs were $282,000 at September 30, 2004.

25

Capital

Stockholders’ equity at September 30, 2004 was $72,397,000 compared to $34,601,000 as of December 31, 2003, an increase of $37,796,000 or 109%. The increase was primarily due the sale of 1,265,000 shares of its common stock at $26.00 per share in a firm commitment underwritten offering lead managed by Oppenheimer & Co., Inc. and co-managed by Howe Barnes Investments, Inc. Additionally, the underwriters exercised an option to purchase 135,871 additional shares of common stock from the Company solely to cover over-allotments. The offering was priced on July 19, 2004 and closed on July 23, 2004. The net proceeds of the sale of common stock were $34,237,000. The Corporation intends to use $15 million of the net proceeds for the acquisition of the Bank of Washtenaw on October 29, 2004. The Corporation will use the remaining net proceeds to increase the Bank’s capital position in anticipation of future growth, and for other general corporate purposes.

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 September 30, 2004
Total capital
(to risk weighted assets)
Consolidated		87,775		16.84	%		41,692		8.00	%		52,115		10.00	%
Bank		51,630		10.07	%		41,031		8.00	%		51,289		10.00	%
Tier 1 capital
(to risk weighted assets)
Consolidated		82,587		15.85	%		20,846		4.00	%		31,269		6.00	%
Bank		46,442		9.06	%		20,515		4.00	%		30,773		6.00	%
Tier 1 capital
(to average assets)
Consolidated		82,587		15.32	%		21,568		4.00	%		26,960		5.00	%
Bank		46,442		9.07	%		20,472		4.00	%		25,589		5.00	%
As of December 31, 2003
Total capital
(to risk weighted assets)
Consolidated		48,893		11.80	%		33,237		8.00	%		41,547		10.00	%
Bank		42,763		10.50	%		32,701		8.00	%		40,877		10.00	%
Tier 1 capital
(to risk weighted assets)
Consolidated		44,579		10.70	%		16,639		4.00	%		24,928		6.00	%
Bank		38,449		9.40	%		16,351		4.00	%		24,526		6.00	%
Tier 1 capital
(to average assets)
Consolidated		44,579		10.20	%		17,460		4.00	%		21,825		5.00	%
Bank		38,449		9.00	%		17,113		4.00	%		21,391		5.00	%

Based on the respective regulatory capital ratios at September 30, 2004 and December 31, 2003, the Corporation and Bank are considered well capitalized.

26

PART I — FINANCIAL INFORMATION

ITEM 3. — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                     RISK

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

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

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

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Different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, and thus changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category. Additionally, the gap analysis does not consider the many factors as banking interest rates move. While the interest rate sensitivity gap is a useful measurement and contributes toward effective asset and liability management, it is difficult to predict the effect of changing interest rates solely on that measure, without accounting for alterations in the maturity or repricing characteristics of the balance sheet that occur during changes in market interest rates. During periods of rising interest rates, the Corporation’s assets tend to have prepayments that are slower than those in an interest rate sensitivity gap and would increase the negative gap position. Conversely, during a period of declining interest rates, the Corporation’s assets would tend to prepay faster than originally expected thus decreasing the negative gap position. In addition, some of the Corporation’s assets, such as adjustable rate mortgages, have caps on the amount by which their interest rates can change in any single period, and therefore may not reprice as quickly as liabilities in the same maturity category.

The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at September 30, 2004, which are expected to mature or reprice in each of the time periods shown below.

	Interest Rate Sensitivity Period
(In thousands)	1-90		91-365			1-5		Over
	Days		Days			Years		5 Years		Total
Earning assets
Federal funds sold	$	11,636	$	—		$	—	$	—	$	11,636
Interest bearing deposits with Banks		29,600		—			—		—		29,600
Mortgage loans held for sale		1,533		—			—		—		1,533
Securities available for sale		24,536		9,416			4,724		840		39,516
Federal Home Loan Bank stock		1,111		—			—		—		1,111
Total loans, net of non-accrual		205,560		19,706			232,305		14,998		472,569
Total earning assets		273,976		29,122			237,029		15,838		555,965
Interest bearing liabilities
Total interest bearing deposits		215,171		122,423			86,284		—		423,878
Federal Home Loan Bank advances		—		10,000			10,614		—		20,614
Trust preferred securities		10,000		—			—		—		10,000
Total interest bearing liabilities		225,171		132,423			96,898		—		454,492
Net asset (liability) funding gap		48,805		(103,301	)		140,131		15,838	$	101,473
Cumulative net asset (liability) funding gap	$	48,805		($54,496	)	$	85,635	$	101,473

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Liquidity.Liquidity refers to readily available funds to meet the needs of borrowers and depositors. Levels of liquidity are closely monitored in conjunction with loan funding requirements and deposit outflows. Adequate liquidity protects institutions from raising funds under duress at excessive expense and provides a necessary cushion for occasional unpredictable aberrations in demand. While adequate liquidity is imperative, excessive liquidity in lower yielding cash investments or other easily marketable assets reduces potential interest income. Thus, an appropriate balance must be maintained to protect the institution and at the same time, prudently maximize income opportunities. Sources of liquidity from both assets and liabilities include federal funds sold, securities available for sale, loan repayments, core deposits, Federal Home Loan Bank advances and a federal funds purchase credit facility.

The following tables provide information about the Bank’s contractual obligations and commitments at September 30, 2004 (in thousands):

Contractual Obligations

			Payments Due By Period
			1-3		3-5		Over 5
	Less Than 1 Year		Years		Years		Years		Total
Long-term borrowings	$	25	$	10,589	$	10,000	$	—	$	20,614
Lease commitments		362		732		641		642		2,377
Subordinated debentures		—		—		—		10,000		10,000
Totals	$	387	$	11,321	$	10,641	$	10,642	$	32,991

Unused Loan Commitments and Letters of Credit

	Amount Of Commitment Expiration Per Period
			1-3		3-5		Over 5
	Less Than 1 Year		Years		Years		Years		Total
Unused loan commitments	$	58,371	$	15,652	$	1,335	$	16,238	$	91,596
Standby letters of credit		2,226		—		3,000		—		5,226
Totals	$	60,597	$	15,652	$	4,335	$	16,238	$	96,822

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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 are effective in timely alerting them to the material information relating to the registrant that is required to be included in the periodic SEC filings.

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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PART II — OTHER INFORMATION

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

(a)	Exhibits
	Exhibit 31.1	CEO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	Exhibit 31.2	CFO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	Exhibit 32.1	CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	Exhibit 32.2	CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)	Two Form 8-K Reports, dated July 23, 2004 and August 24, 2004 were filed during the
	quarter ended September 30, 2004.

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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: November 10, 2004

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EXHIBIT INDEX

EXHIBIT NO.	DESCRIPTION
EX — 31.1	Certification of Chief Executive Officer pursuant to Section 302
EX — 31.2	Certification of Chief Financial Officer pursuant to Section 302
EX — 32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX — 32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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