Dearborn Bancorp (DEAR) 10-Q 2005 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 endedSeptember 30, 2005.

Commission file number 000-24478.

DEARBORN BANCORP, INC.

(Exact name of registrant as specified in its charter)

Michigan (State or other jurisdiction of incorporation or organization)	38-3073622 (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 þ No o

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of October 31, 2005.

Class	Shares Outstanding
Common Stock	5,147,550

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Securities and Exchange Act of 1934).
Yes o No þ

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

Yes o No þ

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, 2005,
		December 31, 2004 and September 30, 2004	4
		Consolidated Statements of Income — For the Three and Nine
		Months Ended September 30, 2005 and 2004	5
		Consolidated Statements of Comprehensive Income — For
		the Three and Nine Months Ended September 30, 2005 and 2004	6
		Consolidated Statements of Cash Flows — For the
		Nine Months Ended September 30, 2005 and 2004	7
		Notes to Consolidated Financial Statements	8-13
Item 2.		Management’s Discussion and Analysis of Financial
		Condition and Results of Operations, Liquidity and Capital	14-29
Item 3.		Quantitative and Qualitative Disclosures about Market Risk	30-32
Item 4.		Controls and Procedures	33
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	34
	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			35

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, 2005 and the related consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2005 and 2004 and the related consolidated statements of cash flows for the nine month periods ended September 30, 2005 and 2004. These financial statements are the responsibility of the company’s management.

We conducted our review in accordance with standards established by 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. 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
November 2, 2005

3

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (unaudited)

(Dollars, in thousands)	09/30/05			12/31/04			09/30/04
ASSETS
Cash and cash equivalents
Cash and due from banks	$	8,714		$	5,946		$	6,343
Federal funds sold		7,893			12,640			11,636
Interest bearing deposits with banks		74			2,283			29,600
Total cash and cash equivalents		16,681			20,869			47,579
Mortgage loans held for sale		2,697			1,692			1,533
Securities, available for sale		14,137			21,075			39,516
Federal Home Loan Bank stock		1,293			1,122			1,111
Loans
Loans		645,003			587,562			474,111
Allowance for loan loss		(6,757	)		(5,884	)		(5,188	)
Net loans		638,246			581,678			468,923
Premises and equipment, net		14,101			13,124			10,987
Real estate owned		661			138			357
Goodwill		5,473			7,080			—
Other intangible assets		2,368			902			—
Accrued interest receivable		2,014			1,889			1,648
Other assets		2,726			3,093			2,439
Total assets	$	700,397		$	652,662		$	574,093
LIABILITIES
Deposits
Non-interest bearing deposits	$	60,222		$	63,065		$	45,136
Interest bearing deposits		513,732			477,815			423,878
Total deposits		573,954			540,880			469,014
Other liabilities
Federal funds purchased		4,500			—			—
Securities sold under agreements to repurchase		2,361			4,115			—
Federal Home Loan Bank advances		25,588			20,614			20,614
Accrued interest payable		1,507			1,107			928
Other liabilities		998			1,342			1,140
Subordinated debentures		10,000			10,000			10,000
Total liabilities		618,908			578,058			501,696
STOCKHOLDERS’ EQUITY
Common stock — 10,000,000 shares authorized, 5,136,456 shares at 09/30/05, 5,033,576 shares at 12/31/04; and 5,003,870 shares at 09/30/04		79,240			74,918			71,370
Retained earnings		2,293			344			1,590
Accumulated other comprehensive loss		(44	)		(658	)		(563	)
Total stockholders’ equity		81,489			74,604			72,397
Total liabilities and stockholders’ equity	$	700,397		$	652,662		$	574,093

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

4

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

	Three Months Ended						Nine Months Ended
(In thousands, except share and per share data)	09/30/05			09/30/04			09/30/05			09/30/04
Interest income
Interest on loans, including fees	$	11,133		$	7,142		$	31,153		$	20,296
Interest on securities, available for sale		125			155			425			293
Interest on federal funds		60			49			187			87
Interest on deposits with banks		16			80			99			97
Total interest income		11,334			7,426			31,864			20,773
Interest expense
Interest on deposits		3,730			2,080			10,107			5,443
Interest on other borrowings		361			234			949			696
Interest on subordinated debentures		190			109			510			332
Total interest expense		4,281			2,423			11,566			6,471
Net interest income		7,053			5,003			20,298			14,302
Provision for loan losses		248			369			991			874
Net interest income after provision for loan losses		6,805			4,634			19,307			13,428
Non-interest income
Service charges on deposit accounts		164			141			480			409
Fees for other services to customers		16			(10	)		65			24
Gain on the sale of loans		125			119			459			493
Gain/(loss) on the sale of real estate		4			—			92			(3	)
Other than temporary impairment of securities		—			—			(696	)		—
Loss on the sale of securities, available for sale		(44	)		—			(44	)		—
Other income		40			(4	)		56			48
Total non-interest income		305			246			412			971
Non-interest expenses
Salaries and employee benefits		2,357			1,868			7,003			5,537
Commissions on the origination of loans		48			52			179			202
Occupancy and equipment expense		628			322			1,875			1,046
Intangible expense		76			—			153			—
Advertising and marketing		74			66			297			223
Stationery and supplies		96			81			281			225
Professional services		265			67			644			281
Data processing		95			82			324			229
Other operating expenses		322			217			1,002			651
Total non-interest expenses		3,961			2,755			11,758			8,394
Income before income tax provision		3,149			2,125			7,961			6,005
Income tax provision		1,070			723			2,705			2,039
Net income	$	2,079		$	1,402		$	5,256		$	3,966
Per share data:
Net income — basic	$	0.41		$	0.31		$	1.03		$	1.04
Net income — diluted	$	0.38		$	0.28		$	0.97		$	0.95
Weighted average number of shares outstanding — basic		5,109,849			4,584,016			5,079,869			3,818,406
Weighted average number of shares outstanding — diluted		5,432,016			4,963,943			5,424,350			4,191,238

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

5

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

	Three Months Ended						Nine Months Ended
(In thousands)	09/30/05			09/30/04			09/30/05			09/30/04
Net income	$	2,079		$	1,402		$	5,256		$	3,966
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during period		(42	)		(552	)		191			(886	)
Less: reclassification adjustment for losses included in net income		44			—			740			—
Tax effects		(2	)		187			(317	)		301
Other comprehensive income (loss)		—			(365	)		614			(585	)
Comprehensive income	$	2,079		$	1,037		$	5,870		$	3,381

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

6

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Nine Months Ended
(In thousands)	9/30/05			9/30/04
Cash flows from operating activities
Interest and fees received	$	31,437		$	20,447
Interest paid		(9,707	)		(5,965	)
Taxes paid		(2,380	)		(1,500	)
Proceeds from sale of mortgages held for sale		26,390			32,667
Origination of mortgages held for sale		(26,936	)		(32,343	)
Cash paid to suppliers and employees		(13,003	)		(8,243	)
Net cash provided by operating activities		5,801			5,063
Cash flows from investing activities
Proceeds from maturities of securities available for sale		7,200			11,000
Proceeds from call of securities available for sale		—			325
Proceeds from sales of securities available for sale		4,000			5,884
Proceeds from repayments of securities available for sale		209			326
Purchases of securities available for sale		(3,535	)		(40,949	)
Purchases of Federal Home Loan Bank stock		(171	)		(38	)
Increase in loans, net of payments received		(57,559	)		(73,153	)
Purchases of property and equipment		(1,691	)		(5,812	)
Net cash used in investing activities		(51,547	)		(102,417	)
Cash flows from financing activities
Net increase in non-interest bearing deposits		(2,843	)		6,055
Net increase in interest bearing deposits		35,917			83,340
Increase (decrease) in federal funds purchased		4,500			—
Net increase of Federal Home Loan Bank advances		4,974			(24	)
Net decrease in other borrowings		(1,754	)		—
Issuance of common stock		28			34,038
Stock option exercise		736			376
Net cash provided by financing activities		41,558			123,785
Decrease in cash and cash equivalents		(4,188	)		26,431
Cash and cash equivalents at the beginning of the period		20,869			21,148
Cash and cash equivalents at the end of the period	$	16,681		$	47,579
Reconciliation of net income to net cash provided by operating activities
Net income	$	5,256		$	3,966
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		991			874
Depreciation and amortization expense		714			379
Accretion of discount on investment securities		(30	)		(53	)
Amortization of premium on investment securities		25			12
Increase in mortgages held for sale		(1,005	)		(28	)
Increase in interest receivable		(125	)		(187	)
Increase in interest payable		400			174
Increase in other assets		(331	)		(751	)
Net change in other liabilities		(94	)		677
Net cash provided by operating activities	$	5,801		$	5,063

The accompanying notes are an integral part of these consolidated financial 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 accounting principles generally accepted in the United States of America and conform to practice within the banking industry.
	The consolidated financial statements of the Corporation as of September 30, 2005 and 2004, and December 31, 2004 and for the three and nine month periods ended September 30, 2005 and 2004 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, 2005 and 2004, and for the three and nine months ended September 30, 2005 and 2004 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 2004 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, determining the fair value of securities and other financial instruments and assessing other than temporary impairments of securities.
	Basic income per share is based on weighted average common shares outstanding during the period. Diluted income per share includes the dilutive effect of additional potential common shares issuable under stock options.

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
	09/30/05		09/30/04		09/30/05		09/30/04
Net income
As reported	$	2,079	$	1,402	$	5,256	$	3,966
Less: stock-based compensation expense determined under fair value based method		—		—		—		9
Pro forma	$	2,079	$	1,402	$	5,256	$	3,957
Basic income per share
As reported	$	0.41	$	0.31	$	1.03	$	1.04
Pro forma	$	0.41	$	0.31	$	1.03	$	1.04
Diluted income per share
As reported	$	0.38	$	0.28	$	0.97	$	0.95
Pro forma	$	0.38	$	0.28	$	0.97	$	0.94

No options were granted during the nine months ended September 30, 2004 or 2005.

9

B.	New Accounting Pronouncements
	FAS 123, Revised, requires companies to record compensation cost for stock options provided to employees in return for employment service. The cost is measured at fair value of the options when granted, and this cost is expensed over the employment service period, which is normally the vesting period of the options. This will apply to awards granted or modified in 2006. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and so cannot currently be predicted. As of September 30, 2005, there have been no options granted in 2005. There will be no significant effect on financial position as total equity will not change.
C.	Securities Available For Sale
	The amortized cost and estimated market value of securities available for sale are as follows (in thousands):

	September 30, 2005
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
US Treasury securities	$	11,700	$	—	($	75	)	$	11,625
Mortgage backed securities		618		9		—			627
Corporate debt securities		1,885		—		—			1,885
Totals	$	14,203	$	9	($	75	)	$	14,137
	December 31, 2004
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
US Treasury securities	$	15,696	$	—	($	62	)	$	15,634
Mortgage backed securities		826		25		—			851
Corporate debt securities		1,550		—		—			1,550
FHLMC preferred stock		4,000		—		(960	)		3,040
Totals	$	22,072	$	25	($	1,022	)	$	21,075

10

The amortized cost and estimated market value of securities available for sale at September 30, 2005 by contractual maturity are shown below (in thousands):

			Estimated
	Amortized		Fair
	Cost		Value
Due in three months or less	$	3,001	$	2,993
Due in three months through one year		7,696		7,645
Due in over one year through five years		1,003		987
Due in over five years		1,885		1,885
Mortgage backed securities		618		627
Totals	$	14,203	$	14,137

The entire portfolio has a net unrealized loss of $66,000 at September 30, 2005. The Corporation had US treasury securities with unrealized losses of $75,000 at September 30, 2005. As of September 30, 2005, these securities have a fair value of $12,775,000 and have been in a continuous loss position for less than 12 months.

Unrealized losses on these securities have not been recognized into income because these securities are of high credit quality, management has the intent and ability to hold these securities for the foreseeable future, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the securities approach their maturity date or reset date.

The Corporation does not hold any securities in the “Held to Maturity” category nor does the Corporation hold or utilize derivatives.

The Corporation recorded an “Other Than Temporary Impairment Loss” on an investment in FHLMC Preferred Stock in the amount of $696,000 during the second quarter of 2005. This security was sold on July 22, 2005. As a result of the sale of this security, the Corporation recognized a loss on the sale of securities, available for sale of $44,000 during the third quarter of 2005. Please refer to the discussion of “Other Than Temporary Impairment Loss” in Management’s Discussion and Analysis of Financial Condition and Statement of Operations for additional information.

11

D.	Stock Incentive Plans
	Stock Option Plan
	Options to buy common stock are granted to officers and employees under a Stock Option Plan which provided for the issue of up to 775,674 shares. There are no shares available for additional grant under this plan. Exercise price is the market price at date of grant. The maximum option term is ten years, and options vest fully after six months from the date of grant.
	A summary of the option activity for the nine months ended September 30, 2005 is as follows:

						Weighted
	Available					Average
	for		Options			Exercise
	Grant		Outstanding			Price
Outstanding at January 1, 2005		—		567,502		$	8.75
Exercised		—		(102,880	)		8.14
Outstanding at September 30, 2005		—		464,622		$	8.88

For the options outstanding at September 30, 2005, the range of exercise prices was $4.39 to $16.96 per share with a weighted-average remaining contractual term of 5.6 years. At September 30, 2005, 464,622 options were exercisable at weighted average exercise price of $8.88 per share. Since all shares authorized for issuance under the Stock Option Plan have been granted, all future awards will be made under the Long-Term Incentive Plan.

Long-Term Incentive Plan

The Corporation’s 2005 Long-Term Incentive Plan (2005 Plan) was approved by the Board of Directors on April 12, 2005 and subsequently by the shareholders of the Corporation at the annual meeting on May 17, 2005. The 2005 Plan will be administered by the Compensation Committee of the Board of Directors and may grant awards in the form of incentive stock options, non-qualified stock options, restricted shares, restricted share units, performance shares and/or performance share units. The maximum number of shares available under the 2005 Plan is 300,000.

As of September 30, 2005, there have been no grants under the 2005 Plan.

12

E.	Acquisition
	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. The assets and liabilities of the Bank of Washtenaw at acquisition and net income derived from those assets and liabilities since the acquisition have been consolidated into the Bank. Washtenaw, which was founded in January 2001, has an office in Saline, Michigan and two offices in Ann Arbor, Michigan. As of October 29, 2004, Washtenaw had total assets of $85,500,000, gross loans of $67,100,000 and total deposits of $66,100,000.
	The acquisition has been accounted for using the purchase method of accounting, and accordingly, the purchase price has been allocated to the tangible and identified intangible assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. Identified intangible assets and purchase accounting fair value adjustments are being amortized under various methods over the expected lives of the corresponding assets and liabilities. Goodwill will not be amortized, but will be reviewed for impairment on an annual basis. Goodwill and other intangible assets are tax deductible over 15 years. During the third quarter of 2005, we completed our analysis of intangible assets. A business relationship intangible of $1,620,000 was identified and separated from goodwill. This intangible asset is being amortized over its estimated life of 17 years. Currently, identified intangible assets subject to amortization are $2,368,000. Goodwill aggregates to $5,473,000.
	The consolidated statements of income reflect the operating results of Washtenaw since the effective date of the acquisition. 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, as if the acquisition had occurred at the beginning of 2004.

	Nine Months Ended
(In thousands, except share and per share data)	9/30/2004
Interest income	$	24,051
Interest expense		7,419
Net interest income		16,632
Provision for loan loss		889
Net interest income after provision for loan losses		15,743
Non-interest income		1,172
Non-interest expense		10,343
Income before income tax provision		6,572
Income tax provision		2,216
Net income	$	4,356
Basic earnings per share	$	1.14
Diluted earnings per share	$	1.04

13

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.

14

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 Corporation acquired the Bank of Washtenaw on October 29, 2004. The three branches, previously operated by the Bank of Washtenaw have been consolidated into the operations of the Bank. 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	Full service retail branch with ATM
	Dearborn, Michigan 48124
December 1995	24935 West Warren Avenue	Full service retail branch
	Dearborn Heights, Michigan 48127
August 1997	44623 Five Mile Road	Full service retail branch with ATM
	Plymouth, Michigan 48170
May 2001	1325 North Canton Center Road	Full service retail branch with ATM
	Canton, Michigan 48187
December 2001	45000 River Ridge Drive	Regional lending center
	Clinton Township, Michigan 48038
November 2002	19100 Hall Road	Full service retail branch with ATM
	Clinton Township, Michigan 48038
February 2003	12820 Fort Street	Full service retail branch with ATM
	Southgate, Michigan 48195
May 2003	3201 University Drive, Suite 180	Full service retail branch
	Auburn Hills, Michigan 48326
October 2004	450 East Michigan Avenue	Full service retail branch with ATM
	Saline, MI 48176
October 2004	250 West Eisenhower Parkway	Full service retail branch with ATM
	Ann Arbor, MI 48103	Regional lending center
October 2004	2180 West Stadium Blvd.	Full service retail branch with ATM
	Ann Arbor, MI 48103
December 2004	1360 Porter Street	Loan production office
	Dearborn, MI 48124	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

15

Results of Operations

The Corporation reported net income of $2,079,000 and $5,256,000 for the three and nine month periods ended September 30, 2005, compared to net income of $1,402,000 and $3,966,000 for the three and nine month periods ended September 30, 2004, an increase of $677,000 or 48% for the three month period and $1,290,000 or 33% for the nine month period. The increase in net income was primarily due to the improvement in net interest income. The improvement in net interest income was primarily due to the increase in the commercial real estate loan and commercial real estate construction loan portfolios during the period. The increase in net interest income was partially offset by the increase in non interest expense and an other than temporary impairment loss on a security.

Net Interest Income

2005 Compared to 2004.As noted on the two charts on the following pages, net interest income for the three and nine month periods ended September 30, 2005 was $7,053,000 and $20,298,000 compared to $5,003,000 and $14,302,000 for the same periods ended September 30, 2004, an increase of $2,050,000 or 41% for the three month period and $5,996,000 or 42% for the nine month period. This increase was caused primarily by the volume of interest earning assets and interest bearing liabilities. The Corporation’s interest rate spread was 3.65% and 3.67% for the three and nine month periods ended September 30, 2005, compared to 3.43% and 3.73% for the same periods in 2004. The Corporation’s net interest margin was 4.20% and 4.15% for the three and nine month periods ended September 30, 2005 compared to 3.82% and 4.05% for the same periods in 2004. The increase in interest rate spread and net interest margin during the three month period ended September 30, 2005 was primarily due to the decrease in funds that were invested in short term investments. The decrease in interest rate spread during the nine month period ended September 30, 2005 is primarily due to the increase in the cost of deposits during the period. The increase in net interest margin during the same period was primarily due to the increase in funds deployed into loans, which earn a higher yield than short term deposits.

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.

16

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

	Three months ended September 30,							Three months ended September 30,
	2005							2004
	Average				Average			Average				Average
(In thousands)	Balance		Interest		Rate			Balance		Interest		Rate
Assets
Interest-bearing deposits with banks	$	2,036	$	16		3.12	%	$	21,945	$	80		1.45	%
Federal funds sold		7,013		60		3.39	%		12,160		49		1.60	%
Securities, available for sale		17,838		125		2.78	%		32,214		155		1.91	%
Loans		638,699		11,133		6.92	%		454,652		7,142		6.25	%
Sub-total earning assets		665,586		11,334		6.76	%		520,971		7,426		5.67	%
Other assets		31,312							18,235
Total assets	$	696,898						$	539,206
Liabilities and stockholders’ equity
Interest bearing deposits	$	507,529	$	3,730		2.92	%	$	400,265	$	2,080		2.07	%
Other borrowings		38,145		551		5.73	%		30,634		343		4.45	%
Sub-total interest bearing liabilities		545,674		4,281		3.11	%		430,899		2,423		2.24	%
Non-interest bearing deposits		62,494							43,553
Other liabilities		2,413							1,711
Stockholders’ equity		80,712							63,043
Total liabilities and stockholders’ equity	$	696,898						$	539,206
Net interest income			$	7,053						$	5,003
Net interest rate spread						3.65	%						3.43	%
Net interest margin on earning assets						4.20	%						3.82	%

17

	Nine months ended September 30,							Nine months ended September 30,
	2005							2004
	Average				Average			Average				Average
(In thousands)	Balance		Interest		Rate			Balance		Interest		Rate
Assets
Interest-bearing deposits with banks	$	4,506	$	99		2.94	%	$	9,842	$	97		1.32	%
Federal funds sold		8,516		187		2.94	%		9,511		87		1.22	%
Investment securities, available for sale		20,123		425		2.82	%		20,978		293		1.87	%
Loans		621,286		31,153		6.70	%		431,617		20,296		6.28	%
Sub-total earning assets		654,431		31,864		6.51	%		471,948		20,773		5.88	%
Other assets		32,759							16,929
Total assets	$	687,190						$	488,877
Liabilities and stockholders’ equity
Interest bearing deposits	$	501,985	$	10,107		2.69	%	$	371,193	$	5,443		1.96	%
Other borrowings		41,643		1,459		4.68	%		30,636		1,028		4.48	%
Sub-total interest bearing liabilities		543,628		11,566		2.84	%		401,829		6,471		2.15	%
Non-interest bearing deposits		63,052							40,559
Other liabilities		2,168							1,229
Stockholders’ equity		78,342							45,260
Total liabilities and stockholders’ equity	$	687,190						$	488,877
Net interest income			$	20,298						$	14,302
Net interest rate spread						3.67	%						3.73	%
Net interest margin on earning assets						4.15	%						4.05	%

18

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
	2005/2004								2005/2004
	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	($	155	)	$	91	($	64	)	($	78	)	$	80	$	2
Federal funds sold		(43	)		54		11			18			82		100
Securities, available for sale		(100	)		70		(30	)		29			103		132
Loans		3,234			757		3,991			9,943			914		10,857
Total earning assets	$	2,935		$	973	$	3,908		$	9,913		$	1,178	$	11,091
Liabilities
Interest bearing deposits	$	801		$	849	$	1,650		$	3,303		$	1,361	$	4,664
Other borrowings		—			98		208			—			31		431
Total interest bearing liabilities	$	801		$	947	$	1,858		$	3,303		$	1,392	$	5,095
Net interest income						$	2,050							$	5,996
Net interest rate spread							0.21	%							(0.06	%)
Net interest margin on earning assets							0.38	%							0.10	%

Provision for Loan Losses

2005 Compared to 2004.The provision for loan losses was $248,000 and $991,000 for the three and nine month periods ended September 30, 2005, compared to $369,000 and $874,000 for the same periods in 2004, a decrease of $121,000 or 33% for the three month period and an increase of $117,000 or 13% for the nine month period. The provision for loan losses for the three and nine month periods ended September 30, 2005 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. The increase in the provision during 2005 was driven by loan growth during 2005 and impacted by net recoveries during the nine months ended September 30, 2004 compared to modest net charge-offs during the same period in 2005.

19

Other Than Temporary Impairment of Securities

The Corporation recorded an “Other Than Temporary Impairment Loss” on a security in the amount of $696,000 during the second quarter of 2005 in accordance with FAS 115, “Accounting for Certain Investments in Debt and Equity Securities” and SEC Staff Accounting Bulletin 59, “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities”.

This security is an issue of 80,000 shares of FHLMC preferred stock with a par value of $50 per share. The Bank purchased this equity security in March of 2001. The security carried an initial interest rate of 4.50% until March 31, 2002. Thereafter, the interest rate reprices annually on April 1 of each year to a rate equal to the 12 month LIBOR minus 20 basis points. Additionally, the dividend on this security is 70% tax deductible. This feature increases the effective yield significantly. As interest rates declined in 2002 and 2003, the yield on this security also declined.

During 2004, management believes that the market value of this security was negatively impacted for two primary factors. The first factor was the declining interest rate environment. Short term interest rates declined during 2002 and 2003 and began to increase during 2004. The yield on this security does not react immediately to shifts in interest rates because of the annual adjustment feature. The coupon on this security did not benefit from the rise in short term interest rates during 2004 due to the timing of the coupon reset date. As the next coupon reset date approached, the market value of this security reacted positively. A repricing and market value table for selected dates is listed below:

				Market Value
	Rate			(per share)
3/23/2001		4.50	%	$	50.00
4/1/2002		2.82	%	$	50.00
4/1/2003		1.14	%	$	50.00
4/1/2004		1.14	%	$	46.25
6/30/2004		1.14	%	$	46.05
9/30/2004		1.14	%	$	39.00
12/31/2004		1.14	%	$	38.00
3/31/2005		1.14	%	$	42.75
6/30/2005		3.64	%	$	41.30

The coupon rate reset on April 1, 2005 at 3.64%. Based on the tax deductibility of the dividend, the tax equivalent yield of this security on the reset date of April 1, 2005 was 4.95%.

20

The second factor in the market value of this security has been the discovery of certain accounting irregularities at FHLMC and FNMA that have raised questions about the credit quality of these organizations. The timing of the decline in the market value of the security also coincides with the public announcements of these accounting irregularities that occurred.

Management expected that the market value of this security would continue to improve with the significant improvement in the dividend rate and the release of FHLMC’s Annual Report to Shareholders. Neither the dividend repricing on April 1, 2005, nor the issuance of FHLMC’s Annual Report on June 14, 2005 has had a significant impact on the fair market value of the security. Therefore, the Corporation recognized the “Other Than Temporary Loss” of $696,000 on June 30, 2005 and sold this security on July 22, 2005. As a result of the sale of this security, the Corporation recognized a loss on the sale of securities, available for sale of $44,000 during the third quarter of 2005.

Non-interest Income

2005 Compared to 2004.Non-interest income was $305,000 and $412,000 for the three and nine month periods ended September 30, 2005, compared to $246,000 and $971,000 for the same periods in 2004, an increase of $59,000 or 24% for three month period and a decrease of $559,000 or 58% for the nine month period. The decrease in non-interest income during the nine month period ended September 30, 2005 compared to the same period in 2004 was due to the “Other Than Temporary Impairment Loss” recognized during the second quarter of 2005 on a single issue of FHLMC preferred stock. This security was subsequently sold at a loss of $44,000 during the third quarter of 2005.

21

Non-interest Expense

2005 Compared to 2004.Non-interest expense was $3,961,000 and $11,758,000 for the three and nine month periods ended September 30, 2005, compared to $2,755,000 and $8,394,000 for the same periods in 2004, an increase of $1,206,000 or 44% for the three month period and $3,364,000 or 40% for the nine month period. The largest component of non-interest expense was salaries and employee benefits which amounted to $2,357,000 and $7,003,000 for the three month and nine month periods ended September 30, 2005, compared to $1,868,000 and $5,537,000 for the same periods in 2004, an increase of $489,000 or 26% for the three month period and $1,466,000 or 26% for the nine month period. The primary factors for the increase in salaries and benefits expense were the acquisition of the Bank of Washtenaw in October of 2004 and the expansion of the commercial lending and retail banking departments. As of September 30, 2005, the number of full time equivalent employees was 147 compared to 112 as of September 30, 2004.

The second largest component of non-interest expense was occupancy and equipment expense. Occupancy and equipment expense amounted to $628,000 and $1,875,000 for the three and nine month periods ended September 30, 2005, compared to $322,000 and $1,046,000 for the same periods in 2004, an increase of $306,000 or 95% for the three month period and $829,000 or 79% for the nine month period. The primary factor in the increase in occupancy and equipment expense was the opening of the Operations Center in Allen Park, Michigan and the relocation of the commercial lending department to the Administrative Building in Dearborn, Michigan during the fourth quarter of 2004. A second factor for the increase is the addition of three branch offices from the acquisition of the Bank of Washtenaw during the fourth quarter of 2004.

Income Tax Provision

2005 Compared to 2004.Income tax expense was $1,070,000 and $2,705,000 for the three and nine month periods ended September 30, 2005, compared to $723,000 and $2,039,000 for the same periods in 2004, an increase of $347,000 or 48% for the three month period and $666,000 or 33% for the nine month period. The increase was primarily a result of increased pre-tax income.

22

Comparison of Financial Condition at September 30, 2005 and December 31, 2004

Assets.Total assets at September 30, 2005 were $700,397,000 compared to $652,662,000 at December 31, 2004, an increase of $47,735,000 or 7%. The increase was primarily due to the increase in loans during the period.

Federal Funds Sold.Total federal funds sold at September 30, 2005 were $7,893,000 compared to $12,640,000 at December 31, 2004, a decrease of $4,747,000 or 38%. The decrease was primarily due to the deployment of available funds into loans.

Interest bearing deposits with banks.Total interest bearing deposits with banks at September 30, 2005 were $74,000 compared to $2,283,000 at December 31, 2004, a decrease of $2,209,000 or 97%. The decrease was primarily due to the deployment of available funds into loans. 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.

Mortgage Loans Held for Sale.Total mortgage loans held for sale at September 30, 2005 were $2,697,000 compared to $1,692,000 at December 31, 2004, an increase of $1,005,000 or 59%. 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, 2005 were $14,137,000 compared to $21,075,000 at December 31, 2004, a decrease of $6,938,000 or 33%. The decrease was due to the sale of securities, available for sale during 2005. The funds from the sale of these securities were utilized to fund loan volume.

Please refer to Note B of the Notes to Consolidated Financial Statements for the amortized cost and estimated market value of securities, available for sale. The entire portfolio has a net unrealized loss of $66,000. The unrealized loss is reflected by an adjustment to stockholders’ equity.

Federal Home Loan Bank Stock.Federal Home Loan Bank stock was valued at $1,293,000 at September 30, 2005, compared to $1,122,000 at December 31, 2004, an increase of $171,000 or 15%.

23

Loans.Total loans at September 30, 2005 were $645,003,000 compared to $587,562,000 at December 31, 2004, an increase of $57,441,000 or 10%. The increase was primarily due to the continued expansion of the commercial lending department during the past twelve months. Major categories of loans included in the loan portfolio are as follows (in thousands):

	9/30/05			12/31/04			9/30/04
Consumer loans	$	38,146		$	42,149		$	27,199
Commercial, financial, & other		128,996			129,103			87,912
Commercial real estate construction		97,924			72,286			57,098
Commercial real estate mortgages		334,660			296,934			255,378
Residential real estate mortgages		45,277			47,090			46,524
		645,003			587,562			474,111
Allowance for loan losses		(6,757	)		(5,884	)		(5,188	)
	$	638,246		$	581,678		$	468,923

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

	9/30/05		12/31/04		9/30/04
Over 90 days past due and still accruing	$	62	$	143	$	4
Non-accrual loans		944		2,956		1,542
Real estate owned		661		136		357
Other repossessed assets		—		2		—
	$	1,667	$	3,237	$	1,903

Non-accrual loans at September 30, 2005 were $944,000. The distribution of non-accrual loans by loan type is as follows:

	Number of
	Loans		Balance
Consumer loans		1		$	25
Commercial, financial, & other		3			449
Commercial real estate construction		—			—
Commercial real estate mortgages		4			234
Residential real estate mortgages		3			236
Total non-accrual loans		11		$	944

24

Allowance for Loan Losses.The allowance for loan losses was $6,757,000 at September 30, 2005 compared to $5,884,000 at December 31, 2004, an increase of $873,000 or 15%. The increase resulted primarily from provisions less net charge-offs recorded during the quarter. The allowance for loan losses was based upon management’s assessment of relevant factors, including loan growth, types and amounts of non-performing loans, historical and anticipated loss experience on such types of loans, and current economic conditions.

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

	Nine Months Ended			Year Ended			Nine Months Ended
	9/30/05			12/31/04			9/30/04
Balance, beginning of year	$	5,884		$	4,314		$	4,314
Allowance on loans acquired		—			184			—
Charge-offs:
Consumer loans		105			31			19
Commercial, financial & other		122			—			—
Commercial real estate construction		—			—			—
Commercial real estate mortgages		86			100			—
Residential real estate mortgages		—			—			94
Recoveries:
Consumer loans		27			13			12
Commercial, financial & other		127			104			41
Commercial real estate construction		—			—			—
Commercial real estate mortgages		9			—			61
Residential real estate mortgages		32			—			—
Net charge-offs (recoveries)		118			14			(1	)
Additions charged to operations		991			1,400			873
Balance, end of period	$	6,757		$	5,884		$	5,188
Allowance to total loans		1.05	%		1.00	%		1.09	%
Allowance to nonperforming assets		409.02	%		181.77	%		272.62	%
Net charge-offs/(recoveries) to average loans		0.02	%		0.00	%		0.00	%

Premises and Equipment.Bank premises and equipment at September 30, 2005 were $14,101,000 compared to $13,124,000 at December 31, 2004, an increase of $977,000 or 7%. The increase in premises and equipment was primarily due to the renovation at the Bank’s Operations Center in Allen Park, Michigan, the addition of additional parking at the Bank’s Dearborn Heights branch office and the updating of equipment at several locations.

25

Real estate owned.Real estate owned at September 30, 2005 was $661,000 compared to $138,000 at December 31, 2004, an increase of $523,000 or 379%. Real estate owned at September 30, 2005 is comprised of three residential properties with an appraised value of $782,000. The Bank expects to realize a gain as a result of the sale of these properties during 2005.

Goodwill and other intangible assets.Goodwill and other intangible assets were $7,841,000 at September 30, 2005 compared to $7,982,000 at December 31, 2004. The Bank has intangible assets for the estimated value of core deposit accounts and business relationships acquired in the acquisition of the Bank of Washtenaw. The intangible values represent the present value of the net revenue streams attributable to these intangibles. The core deposit intangible amounted to $929,000 and is being amortized over ten years. The business relationship intangible amounted to $1,620,000 and is being amortized over seventeen years.

The balance of the acquisition price in excess of the fair market value of the assets and liabilities acquired, including intangible assets, was recorded as goodwill and totaled $5.5 million. Goodwill is defined as an intangible asset with an indefinite useful life, and as such, is not amortized, but is required to be tested annually for impairment of the value. If impaired, an impairment loss must be recorded for the value equal to the excess of the asset’s carrying value over its fair value.

Accrued Interest Receivable.Accrued interest receivable at September 30, 2005 was $2,014,000 compared to $1,889,000 at December 31, 2004, an increase of $125,000 or 7%. The increase was primarily due to the increase in the Bank’s loan portfolio.

Other Assets. Other assets at September 30, 2005 were $2,726,000 compared to $3,093,000 at December 31, 2004, a decrease of $367,000 or 12%. The decrease was primarily due to changes in deferred tax assets.

26

Deposits.Total deposits at September 30, 2005 were $573,954,000 compared to $540,880,000 at December 31, 2004, an increase of $33,074,000 or 6%. The following is a summary of the distribution of deposits (in thousands):

	9/30/05		12/31/04		9/30/04
Non-interest bearing:
Demand	$	60,222	$	63,065	$	45,136
Interest bearing:
Checking	$	15,286	$	15,400	$	14,988
Money market		38,118		54,957		34,336
Savings		74,687		83,773		91,611
Time, under $100,000		140,639		124,448		99,620
Time, $100,000 and over		245,002		199,237		183,323
		513,732		477,815		423,878
Total deposits	$	573,954	$	540,880	$	469,014

The increase in deposits was primarily due to normal business development, marketing, telemarketing, referral programs and growth strategies which included a weeklong celebration in March 2005 that highlighted the Bank’s Anniversary. Management expects deposits to grow at an increasing rate during the remainder of 2005.

The Bank has enacted a strategy to utilize public funds to a higher degree. The Bank will also utilize brokered deposits. Brokered deposits were $35,640,000, $19,190,000 and $14,190,000 at September 30, 2005, December 31, 2004 and September 30, 2004, respectively. 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):

	9/30/05		12/31/04		9/30/04
Interest bearing checking	$	1,380	$	2,633	$	5,047
Time, $100,000 and over		81,264		71,058		77,044
Total municipal deposits	$	82,644	$	73,691	$	82,091

27

Federal Funds Purchased. Federal funds purchased were $4,500,000 at September 30, 2005, compared to $0 at December 31, 2004. The Bank has various borrowing lines of credit that are utilized as a short term source of funding.

Securities Sold Under Agreement to Repurchase. Securities sold under agreements to repurchase at September 30, 2005 were $2,361,000 compared to $4,115,000 at December 31, 2004, a decrease of $1,754,000 or 43%. These repurchase agreements are secured by securities held by the Bank.

Federal Home Loan Bank Advances. Federal Home Loan Bank advances at September 30, 2005 were $25,588,000, compared to $20,614,000 at December 31, 2004, an increase of $4,974,000 or 24%. The increase was due to the funding of a Federal Home Loan Bank advance of $5,000,000 during the second quarter of 2005 less a scheduled repayment during the third quarter of 2005.

Accrued Interest Payable. Accrued interest payable at September 30, 2005 was $1,507,000 compared to $1,107,000 at December 31, 2004, an increase of $400,000 or 36%. The increase was primarily due to the increasing amount and cost of interest bearing deposits and borrowings during the period.

Other Liabilities. Other liabilities at September 30, 2005 were $998,000 compared to $1,342,000 at December 31, 2004, a decrease of $344,000 or 26%. The decrease was primarily due to the decrease in expenses payable during the period.

Subordinated Debentures. Subordinated debentures were $10,000,000 at September 30, 2005 and December 31, 2004.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 securities available for sale until they can be 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 $272,000 at September 30, 2005.

28

Capital

Stockholders’ equity at September 30, 2005 was $81,489,000 compared to $74,604,000 as of December 31, 2004, an increase of $6,885,000 or 9%.

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, 2005
Total capital (to risk weighted assets)
Consolidated	$	90,430		13.08	%	$	55,294		8.00	%	$	69,117		10.00	%
Bank		73,337		10.71	%		54,769		8.00	%		68,462		10.00	%
Tier 1 capital (to risk weighted assets)
Consolidated		83,673		12.11	%		27,647		4.00	%		41,470		6.00	%
Bank		66,580		9.73	%		27,385		4.00	%		41,077		6.00	%
Tier 1 capital (to average assets)
Consolidated		83,673		12.01	%		27,876		4.00	%		34,845		5.00	%
Bank		66,580		9.79	%		27,216		4.00	%		34,020		5.00	%
As of December 31, 2004
Total capital (to risk weighted assets)
Consolidated	$	81,868		13.27	%	$	49,360		8.00	%	$	61,700		10.00	%
Bank		63,986		10.47	%		48,913		8.00	%		61,141		10.00	%
Tier 1 capital (to risk weighted assets)
Consolidated		75,984		12.32	%		24,680		4.00	%		37,020		6.00	%
Bank		58,102		9.50	%		24,457		4.00	%		36,685		6.00	%
Tier 1 capital (to average assets)
Consolidated		75,984		12.12	%		25,079		4.00	%		31,348		5.00	%
Bank		58,102		9.78	%		23,765		4.00	%		29,706		5.00	%

Based on the respective regulatory capital ratios at September 30, 2005 and December 31, 2004, the Corporation and Bank are considered well capitalized.

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PART I — FINANCIAL INFORMATION

ITEM 3. — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at September 30, 2005, 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	$	7,893	$	—		$	—	$	—	$	7,893
Interest bearing deposits with Banks		74		—			—		—		74
Mortgage loans held for sale		2,697		—			—		—		2,697
Securities available for sale		9,544		3,001			987		605		14,137
Federal Home Loan Bank stock		1,293		—			—		—		1,293
Total loans, net of non-accrual		294,890		23,474			300,846		24,848		644,058
Total earning assets		316,391		26,475			301,833		25,453		670,152
Interest bearing liabilities
Total interest bearing deposits		236,725		160,698			116,309		—		513,732
Federal funds purchased		4,500		—			—		—		4,500
Federal Home Loan Bank advances		27		20,561			5,000		—		25,588
Other Borrowings		2,361		—			—		—		2,361
Trust preferred securities		10,000		—			—		—		10,000
Total interest bearing liabilities		253,613		181,259			121,309		—		556,181
Net asset (liability) funding gap		62,778		(154,784	)		180,524		25,453	$	113,971
Cumulative net asset (liability) funding gap	$	62,778	($	92,006	)	$	88,518	$	113,971

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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, 2005 (in thousands):

Contractual Obligations

		Payments Due By Period
		Less Than 1 Year		1-3 Years		3-5 Years		Over 5 Years		Total
Securities sold under agreements to repurchase	��	$	2,361		—		—		—	$	2,361
Certificates of deposit			269,332		100,917		15,392		—		385,641
Federal funds purchased			4,500		—		—		—		4,500
Long-term borrowings			27		20,561		5,000		—		25,588
Lease commitments			617		970		837		324		2,748
Subordinated debentures			—		—		—		10,000		10,000
Totals		$	276,837	$	122,448	$	21,229	$	10,324	$	430,838

Unused Loan Commitments and Letters of Credit

	Amount Of Commitment Expiration Per Period
	Less Than 1 Year		1-3 Years		3-5 Years		Over 5 Years		Total
Unused loan commitments	$	68,674	$	25,889	$	2,542	$	29,789	$	126,894
Standby letters of credit		1,032		5,523		992		—		7,547
Totals	$	69,706	$	31,412	$	3,534	$	29,789	$	134,441

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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 September 30, 2005.

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

(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 19, 2005 were filed during the quarter ended September 30, 2005.

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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, 2005

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Exhibit Index

Number	Description
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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