Dearborn Bancorp (DEAR) 10-Q 2006 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly period endedSeptember 30, 2006.

Commission file number 000-24478.

DEARBORN BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

(313) 565-5700

(Registrant’s telephone number, including area code)

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.

Yesþ       Noo

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of October 31, 2006.

Class	Shares Outstanding
Common Stock	5,617,565

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

Large accelerated filero       Accelerated filerþ       Non-accelerated filero

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

Yeso       Noþ

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:
		Report of Independent Registered Public Accounting Firm		3
		Consolidated Balance Sheets – September 30, 2006, December 31, 2005 and September 30, 2005		4
		Consolidated Statements of Income - For the Three and Nine Months Ended September 30, 2006 and 2005		5
		Consolidated Statements of Comprehensive Income - For the Three and Nine Months Ended September 30, 2006 and 2005		6
		Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2006 and 2005		7-8
		Notes to Consolidated Financial Statements		9-16
Item 1A		Risk Factors		16
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital		17-33
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		34-36
Item 4.		Controls and Procedures		37
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
	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				39
CEO Certification pursuant to Section 302
CFO Certification pursuant to Section 302
CEO Certification pursuant to Section 906
CFO Certification 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, 2006 and 2005 and the related consolidated statements of income and comprehensive income for the three and nine month periods ended September 30, 2006 and 2005 and the related statements of cash flows for the nine month periods ended September 30, 2006 and 2005. 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, 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
November 8, 2006

3

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (unaudited)

(Dollars, in thousands)	09/30/06			12/31/05			09/30/05
ASSETS
Cash and cash equivalents
Cash and due from banks	$	8,975		$	7,118		$	8,714
Federal funds sold		9,093			2,268			7,893
Interest bearing deposits with banks		52			69			74
Total cash and cash equivalents		18,120			9,455			16,681
Mortgage loans held for sale		1,096			1,041			2,697
Securities, available for sale		5,837			17,153			14,137
Federal Home Loan Bank stock		1,290			1,293			1,293
Loans
Loans		741,030			657,037			645,003
Allowance for loan loss		(7,615	)		(6,808	)		(6,757	)
Net loans		733,415			650,229			638,246
Premises and equipment, net		14,173			13,792			14,101
Real estate owned		52			663			661
Goodwill		5,473			5,473			5,473
Other intangible assets		2,103			2,291			2,368
Accrued interest receivable		2,868			2,586			2,014
Other assets		3,372			2,521			2,726
Total assets	$	787,799		$	706,497		$	700,397
LIABILITIES
Deposits
Non-interest bearing deposits	$	54,292		$	59,652		$	60,222
Interest bearing deposits		596,819			522,786			513,732
Total deposits		651,111			582,438			573,954
Other liabilities
Federal funds purchased		10,200			—			4,500
Securities sold under agreements to repurchase		631			1,615			2,361
Federal Home Loan Bank advances		25,561			25,588			25,588
Other liabilities		421			960			998
Accrued interest payable		2,508			1,683			1,507
Subordinated debentures		10,000			10,000			10,000
Total liabilities		700,432			622,284			618,908
STOCKHOLDERS’ EQUITY
Common stock - 10,000,000 shares authorized, 5,617,565 shares at 09/30/06, 5,683,061 shares at 12/31/05; and 5,663,329 shares at 09/30/05		85,353			83,684			79,240
Retained earnings		2,025			573			2,293
Accumulated other comprehensive loss		(11	)		(44	)		(44	)
Total stockholders’ equity		87,367			84,213			81,489
Total liabilities and stockholders’ equity	$	787,799		$	706,497		$	700,397

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)	09/30/06		09/30/05			09/30/06			09/30/05
Interest income
Interest on loans, including fees	$	13,505	$	11,133		$	38,129		$	31,153
Interest on securities, available for sale		204		125			519			425
Interest on federal funds		155		60			376			187
Interest on deposits with banks		6		16			152			99
Total interest income		13,870		11,334			39,176			31,864
Interest expense
Interest on deposits		6,332		3,730			16,783			10,107
Interest on other borrowings		467		361			1,100			949
Interest on subordinated debentures		225		190			635			510
Total interest expense		7,024		4,281			18,518			11,566
Net interest income		6,846		7,053			20,658			20,298
Provision for loan losses		470		248			782			991
Net interest income after provision for loan losses		6,376		6,805			19,876			19,307
Non-interest income
Service charges on deposit accounts		184		164			507			480
Fees for other services to customers		12		16			38			65
Gain on the sale of loans		79		125			254			459
Gain (loss) on the sale of securities, available for sale		9		(44	)		9			(44	)
Other than temporary impairment of securities		—		—			—			(696	)
Gain (loss) on the sale of real estate		—		4			(103	)		92
Other income		13		40			32			56
Total non-interest income		297		305			737			412
Non-interest expenses
Salaries and employee benefits		2,637		2,357			7,514			7,003
Commissions on the origination of loans		87		48			152			179
Occupancy and equipment expense		602		628			1,827			1,875
Intangible expense		63		76			188			153
Advertising and marketing		138		74			339			297
Stationery and supplies		124		96			285			281
Professional services		220		265			578			644
Data processing		124		95			380			324
Other operating expenses		306		322			914			1,002
Total non-interest expenses		4,301		3,961			12,177			11,758
Income before income tax provision		2,372		3,149			8,436			7,961
Income tax provision		807		1,070			2,869			2,705
Net income	$	1,565	$	2,079		$	5,567		$	5,256
Per share data:
Net income — basic	$	0.28	$	0.37		$	0.98		$	0.94
Net income — diluted	$	0.26	$	0.35		$	0.93		$	0.88
Weighted average number of shares outstanding — basic		5,645,102		5,633,994			5,681,843			5,599,836
Weighted average number of shares outstanding — diluted		5,941,324		5,988,593			5,978,345			5,975,606

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)	09/30/06			09/30/05			09/30/06			09/30/05
Net income	$	1,565		$	2,079		$	5,567		$	5,256
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during period		44			(42	)		59			191
Less: reclassification adjustment for (gains) losses included in net income		(9	)		44			(9	)		740
Tax effects		(12	)		(2	)		(17	)		(317	)
Other comprehensive income		23			—			33			614
Comprehensive income	$	1,588		$	2,079		$	5,600		$	5,870

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

6

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended
(In thousands)	9/30/06			9/30/05
Cash flows from operating activities
Interest and fees received	$	38,897		$	31,437
Interest paid		(17,693	)		(9,707	)
Proceeds from sale of mortgage loans held for sale		16,810			26,390
Origination of mortgage loans held for sale		(16,611	)		(26,936	)
Taxes paid		(3,490	)		(2,380	)
Gain/(loss) on sale of real estate owned		(103	)		92
Cash paid to suppliers and employees		(10,993	)		(13,187	)
Net cash provided by operating activities		6,817			5,709
Cash flows from investing activities
Proceeds from calls, maturities, sales and repayments of securities, available for sale		30,669			11,409
Purchases of securities available for sale		(19,039	)		(3,535	)
(Purchase) sale of Federal Home Loan Bank stock		3			(171	)
Increase in loans, net of payments received		(83,968	)		(57,559	)
Purchases of property and equipment		(1,087	)		(1,691	)
Net cash used in investing activities		(73,422	)		(51,547	)
Cash flows from financing activities
Net decrease in non-interest bearing deposits		(5,360	)		(2,843	)
Net increase in interest bearing deposits		74,033			35,917
Increase (decrease) in Federal Home Loan Bank advances		(27	)		4,974
Net increase in federal funds payable		10,200			4,500
Decrease in other borrowings		(984	)		(1,754	)
Purchase of common stock		(2,824	)		—
Exercise of stock options		174			764
Tax benefit of stock options exercised		58			—
Net cash provided by financing activities		75,270			41,558
Increase (decrease) in cash and cash equivalents		8,665			(4,188	)
Cash and cash equivalents at the beginning of the period		9,455			20,869
Cash and cash equivalents at the end of the period	$	18,120		$	16,681

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

7

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

	Nine Months Ended
(In thousands)	9/30/06			9/30/05
Reconciliation of net income to net cash provided by operating activities
Net income	$	5,567		$	5,256
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		782			991
Depreciation and amortization expense		706			714
Restricted stock award expense		101			—
Stock option expense		45			—
Accretion of discount on investment securities		(272	)		(30	)
Amortization of premium on investment securities		8			25
Amortization of intangible assets		188			153
Increase in mortgage loans held for sale		(55	)		(1,005	)
Increase in interest receivable		(282	)		(125	)
Increase in interest payable		825			400
Increase in other assets		(257	)		(576	)
Decrease in other liabilities		(539	)		(94	)
Net cash provided by operating activities	$	6,817		$	5,709
Supplemental noncash disclosures:
Transfers from loans to real estate owned	$	91		$	1,850

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

8

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, 2006 and 2005, and December 31, 2005 and for the three and nine month periods ended September 30, 2006 and 2005 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, 2006 and 2005, and for the three and nine month periods ended September 30, 2006 and 2005 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 2005 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 and assessing other than temporary impairments of securities.

9

A.

Accounting and Reporting Policies (continued)

The Corporation adopted FAS 123, Revised on January 1, 2006. 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 the 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 fiscal years beginning in 2006. 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. Options granted under the 2005 Long Term Incentive Plan were “variable”, as defined by FAS 123. Upon adoption of FAS 123, Revised, the remaining unrecognized fair value of these options at the grant date will be expensed over the remaining service period. Any income tax benefit for the exercise of stock options in excess of income tax expense for financial reporting purposes will be classified as a cash inflow for financing activities and a cash outflow for operating activities in the statement of cash flows. For additional information regarding the Corporation’s incentive stock plans, refer to Note C.

10

B.	Securities Available For Sale
	The amortized cost and fair value of securities available for sale are as follows (in thousands):

	September 30, 2006
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
US Treasury securities	$	4,995	$	—		($20	)	$	4,975
Mortgage backed securities		441		—		(1	)		440
Municipal securities		418		4		—			422
Totals	$	5,854	$	4		($21	)	$	5,837

	December 31, 2005
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
US Treasury securities	$	16,665	$	—		($68	)	$	16,597
Mortgage backed securities		555		2		(1	)		556
Totals	$	17,220	$	2		($69	)	$	17,153

The amortized cost and fair value of securities available for sale at September 30, 2006 by contractual maturity are shown below (in thousands):

	Amortized		Fair
	Cost		Value
Due in three months or less	$	1,000	$	996
Due in over three months through one year		1,995		1,989
Due in over one year through five years		2,000		1,990
Due in over five years		418		422
Mortgage backed securities		441		440
Totals	$	5,854	$	5,837

11

The entire portfolio has a net unrealized loss of $17,000 at September 30, 2006. Securities with unrealized losses at September 30, 2006, aggregated by investment category and the length of time that the securities have been in a continuous loss position (in thousands) are as follows:

Investment category	Fair Value		Unrealized Loss
US treasury securities	$	4,975		($20	)
Mortgage backed securities		171		(1	)
Total temporarily impaired	$	5,146		($21	)

Length of time in a continuous loss position	Fair Value		Unrealized Loss
Less than one year	$	4,149		($17	)
One to three years		997		(4	)
Total temporarily impaired	$	5,146		($21	)

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.

12

C.	Stock Incentive Plans
	Incentive stock awards have been granted to officers and employees under two Incentive Stock Plans. The first plan is the 1994 Stock Option Plan. Options to buy common stock have been granted to officers and employees under the 1994 Stock Option Plan, which provides for issue of up to 738,729 shares. No further options grants may be made under this plan.
	A summary of the option activity in the 1994 Plan follows:

						Weighted
	Available					Average
	For		Options			Exercise
	Grant		Outstanding			Price
Outstanding at January 1, 2006		—		492,510		$	8.40
Exercised		—		(33,861	)		5.53
Outstanding at September 30, 2006		—		458,649		$	8.61

For the options outstanding at September 30, 2006, the range of exercise prices was $4.39 to $15.38 per share with a weighted-average remaining contractual term of 4.7 years. At September 30, 2006, 458,649 options were exercisable at weighted average exercise price of $8.61 per share. There were no antidilutive options outstanding for the quarters ended September 30, 2006 and 2005, respectively. The intrinsic value of options exercised during the nine months ended September, 2006 was approximately $570,000 and the intrinsic value of options outstanding at September 30, 2006 was approximately $6,958,000.

During 2005, the Corporation initiated the 2005 Long-Term Incentive Plan. Under this plan, up to 330,750 shares may be granted to officers and employees of the Bank. This plan provides that stock awards may take the form of any combination of options, restricted shares, restricted share units or performance awards.

The administration of the plan, including the granting of awards and the nature of those awards is determined by the Corporation’s Compensation Committee. In October of 2005 and August of 2006, the Corporation’s Board of Directors approved grants of stock options and restricted stock. The awards have a term of ten years and typically vest fully three years from the grant date. In order for vesting to occur, the Corporation must meet certain performance criteria over the vesting period. The expected compensation cost of the 2005 plan is being calculated assuming the Corporation’s attainment of “target” performance goals over the vesting period of the options. The actual cost of these awards could range from zero to 150% of the currently recorded compensation cost, depending on the Corporation’s actual performance.

13

C.	Incentive Stock Plans (con’t)
	Stock Options Granted — The incentive stock options were granted with exercise prices equal to market prices on the day of grant. A summary of options granted under the 2005 Incentive Plan is listed below:

			Weighted
			Average
	Options		Exercise
Grant Date	Outstanding		Price		Vesting Date
10/12/2005		16,631	$	21.87	6/30/2008
8/29/2006		16,934		23.95	6/30/2009
		33,565	$	22.92

There were 33,565 anti-dilutive stock options for the quarter ended September 30, 2006. There were no anti-dilutive stock options for the quarter ended September 30, 2005. The intrinsic value of the options outstanding at September 30, 2006 was approximately $32,000.

The following assumptions were used to determine weighted average fair value of the options granted on 8/29/06 as of the grant date:

	2006
Risk-free interest rate		4.77	%
Expected option life	6.5 years
Dividend yield		0.00	%
Expected volatility of stock price		18.36	%

During the nine months ended September 30, 2006, the Corporation recognized stock option compensation expense of $45,000. The stock options vest on June 30, 2008 and June 30, 2009. Compensation cost of $67,000, $87,000 and $44,000 is expected to be recognized during 2006, 2007 and 2008, respectively.

Restricted Stock Grants — Restricted stock totaling 12,231 shares and 11,656 shares were granted to officers on October 12, 2005 and August 29, 2006, respectively. The restricted stock vests on June 30, 2008 and June 30, 2009. Compensation cost of $101,000 and a tax benefit of $34,000 was recognized during the nine months ended September 30, 2006. Compensation cost of $150,000, $197,000 and $93,000 is expected to be recognized during 2006, 2007 and 2008, respectively.

14

C.	Incentive Stock Plans (con’t)
	FAS 123, Revised, adopted January 1, 2006 requires certain additional disclosures beyond what was included in the Corporation’s 2005 Annual Report. The intrinsic value of options exercised during 2003, 2004 and 2005 were $572,000, $1,280,000 and $1,592,000, respectively. The intrinsic value of options outstanding at December 31, 2005 was $7,472,000 for options issued under the 1994 Stock Option Plan and $27,000 for options issued under the 2005 Long-Term Incentive Plan. The fair value of options vesting during 2003 and 2004 was $792,000 and $9,000, respectively. No options vested in 2005. Shares issued for option exercises are expected to come from authorized but unissued shares.
D.	Effect of Newly Issued But Not Yet Effective Accounting Standards
	In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS 109, Accounting for Income Taxes. FIN 48 prescribes a recognition and measurement threshold for a tax position taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Corporation has not completed its evaluation of the impact of the adoption of FIN 48.
	In September 2006, the Securities and Exchange Commission released Staff Accounting Bulletin (SAB) 108. This SAB provides detailed guidance to registrants in the determination of what is material to their financial statements. This SAB is required to be applied to financial statements issued after November 15, 2006. Upon adoption, the cumulative effect of applying the new guidance is to be reflected as an adjustment to opening retained earnings as of the beginning of the current fiscal year. The Corporation has not completed its evaluation of the impact of SAB 109.

15

E.	Acquisition
	On September 14, 2006, the Corporation signed a definitive agreement to acquire Fidelity Financial Corporation of Michigan (“Fidelity”) for $70,500,000 in cash. The transaction is scheduled to close in January 2007, pending regulatory approval. As of June 30, 2006, Fidelity had total assets of $251,000,000, gross loans of $185,000,000 and total deposits of $217,000,000.
	The acquisition will be accounted for using the purchase method of accounting which requires the purchase price to be allocated to the tangible and identified intangible assets purchased and liabilities assumed based upon their estimated fair values at the date of acquisition. These purchase accounting adjustments will be amortized or accreted into income over the estimated lives of the related assets and liabilities. Goodwill will not be amortized, but will be reviewed for impairment on an annual basis. Goodwill and other intangible assets will be tax deductible over 15 years. Goodwill and other intangible assets are expected to aggregate to approximately $42,000,000.
	The acquisition of Fidelity will be funded primarily with the issuance of 2,700,000 shares of the Corporation’s common stock in a public offering during November 2006. The stock offering is expected to raise approximately $55,000,000. The remainder of the purchase price of Fidelity is expected to be funded with cash obtained through a reduction in federal funds sold.

ITEM 1A – RISK FACTORS

There have been no material changes to the risk factors applicable to the Corporation from those disclosed in its Annual report on Form 10-K for the year ended December 31, 2005.

16

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.

17

Overview

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 Bank plans to open its ninth branch office during the first quarter of 2007 in Shelby Township, 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 48124	Full service retail branch with ATM
December 1995	24935 West Warren Avenue Dearborn Heights, Michigan 48127	Full service retail branch
August 1997	44623 Five Mile Road Plymouth, Michigan 48170	Full service retail branch with ATM
May 2001	1325 North Canton Center Road Canton, Michigan 48187	Full service retail branch with ATM
December 2001	45000 River Ridge Drive Clinton Township, Michigan 48038	Regional lending center
November 2002	19100 Hall Road Clinton Township, Michigan 48038	Full service retail branch with ATM
February 2003	12820 Fort Street Southgate, Michigan 48195	Full service retail branch with ATM
May 2003	3201 University Drive, Suite 180 Auburn Hills, Michigan 48326	Full service retail branch Regional lending center
October 2004	450 East Michigan Avenue Saline, MI 48176	Full service retail branch with ATM
October 2004	250 West Eisenhower Parkway Ann Arbor, MI 48103	Full service retail branch with ATM Regional lending center
October 2004	2180 West Stadium Blvd. Ann Arbor, MI 48103	Full service retail branch with ATM
December 2004	1360 Porter Street Dearborn, MI 48124	Loan production office 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

18

While maintaining high asset quality and improving profitability, we have sustained substantial asset growth since we commenced operations. The expansion of our commercial banking department has been a primary element of our growth. We expect to continue our organic growth in the southeastern Michigan market by opening new branches and to explore additional acquisitions as they become available.

Our ability to grow organically and to take advantage of acquisition opportunities will be impacted by our profitability and our ability to raise capital in the public markets. During 2004, we raised $36.4 million in a public offering, which was used to support both the acquisition of the Bank of Washtenaw and our continued organic growth. During the fourth quarter of 2006, we expect to raise $55.1 million in a public offering, which will support the acquisition of Fidelity during the first quarter of 2007.

Our results of operations depend largely on our net interest income. Net interest income is the difference in interest income we earn on interest earning assets, which are comprised primarily of commercial real estate loans, and to a lesser extent commercial construction, commercial business, residential real estate and consumer loans, and the interest that we pay on our interest-bearing liabilities, which are primarily deposits and other borrowings. Management strives to match the re-pricing characteristics of the interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve.

The results of our operations may also be affected by local and general economic conditions. The economic base of our primary market area, southeastern Michigan continues to diversify away from the automotive sector. This trend should lessen the impact of future economic downturns in the automotive sector. Southeastern Michigan’s proximity to major highways and affordable housing has continued to spur economic growth in the area. Changes in the local economy may affect the demand for commercial real estate loans and related small to medium business related products. This could have a significant impact on how we deploy earning assets. The competitive environment among other financial institutions and financial service providers in southeastern Michigan may affect the pricing levels of various deposit products. The impact of competitive rates on deposit products may increase the relative cost of funds for us and thus negatively impact net interest income.

We continue to see competitive deposit rates offered from local financial institutions, which could have the effect of increasing the cost of funds to a level higher than we project. We continue to utilize wholesale forms of funding through FHLB advances and brokered certificates of deposit to balance both interest rate risk and the overall cost of funds. Brokered and internet certificates of deposit are based on a nationwide interest rate structure, typically at what is considered to be a premium interest rate. The local competition for certificates of deposit products has intensified and we have found this type of wholesale funding to often effectively compete with the rates offered for similar term retail certificates of deposit products of local community and regional banks.

19

Net income during the first nine months of 2006 was affected by a compression in net interest margin compared with the same period last year. This was the result of competitive pricing pressure in both loans and deposit generation. Additionally, the continuation of a flat treasury yield curve has resulted in overall lower interest rate spreads than in other reporting periods.

On September 14, 2006, we signed a definitive agreement to acquire Fidelity, which is a bank holding company headquartered in Birmingham, Michigan, and which is the parent company of Fidelity Bank. Fidelity Bank is a commercial bank with seven offices in Oakland County, Michigan. Oakland County is one of the largest and most affluent counties in the United States. The transaction is expected to improve financial returns by utilizing existing operating capacity to improve efficiency. Annual cost savings are expected following the completion of the transaction and the complementary strengths of the two companies are expected to generate revenue opportunities. These enhancements are expected to further improve operating results and key financial ratios. These estimates are based on assumptions made during the due diligence process and may change prior to completion of the merger as a result of obtaining more detailed information while developing the integration plan.

The transaction with Fidelity is expected to have a significant impact on our financial position, results of operations and future cash flows. The full impact is not yet known, given the uncertainties around the timing of the consummation of the transaction, and the impact of potential operational and financial initiatives that have not yet been finalized. Unless otherwise noted, forward looking information regarding results of operations excludes the impact of the transaction.

20

Results of Operations

The Corporation reported net income of $1,565,000 and $5,567,000 for the three and nine month periods ended September 30, 2006, compared to net income of $2,079,000 and $5,256,000 for the three and nine month periods ended September 30, 2005, a decrease of $514,000 or 25% for the three month period and an increase of $311,000 or 6% for the nine month period. The decrease in net income during the three month period was primarily due to increases in the provision for loan losses and non-interest expenses and a decrease in net interest income. The increase in provision for loan losses is the result of increased loan demand during the period. The increase in non-interest expenses was primarily the result of increased salaries and employee benefits. The decrease in net interest income was primarily caused by the increased cost of deposits. The increase during the nine month period was primarily due to the improvement in net interest income and a write-down in the value of a security during the three months ended June 30, 2005 and partially offset by an increase in non-interest expense. 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 during the period. The write-down of the security was the recognition of an other than temporary loss on a single issue of FHLMC preferred stock.

Net Interest Income

2006 Compared to 2005.As noted on the two charts on the following pages, net interest income for the three and nine month periods ended September 30, 2006 was $6,846,000 and $20,658,000 compared to $7,053,000 and $20,298,000 for the same periods ended September 30, 2005, a decrease of $207,000 or 3% for the three month period and an increase of $360,000 or 2% for the nine month period. The decrease during the three month period was caused primarily by the increased cost of deposits. This increase during the nine month period was caused primarily by the increased volume of interest earning assets and interest bearing liabilities but offset by the decrease in the net interest rate spread. The Corporation’s interest rate spread was 2.95% and 3.17% for the three and nine month periods ended September 30, 2006, compared to 3.65% and 3.67% for the same periods in 2005. The Corporation’s net interest margin was 3.65% and 3.84% for the three and nine month periods ended September 30, 2006 compared to 4.20% and 4.15% for the same periods in 2005. The decrease in interest rate spread and net interest margin was primarily due to the increased cost of 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.

21

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

	Three months ended							Three months ended
	September 30, 2006							September 30, 2005
	Average				Average			Average				Average
(In thousands)	Balance		Interest		Rate			Balance		Interest		Rate
Assets
Interest-bearing deposits with banks	$	491	$	6		4.85	%	$	2,036	$	16		3.12	%
Federal funds sold		11,436		155		5.38	%		7,013		60		3.39	%
Investment securities, available for sale		17,307		204		4.68	%		17,838		125		2.78	%
Loans		715,783		13,505		7.49	%		638,699		11,133		6.92	%
Sub-total earning assets		745,017		13,870		7.39	%		665,586		11,334		6.76	%
Other assets		29,712							31,312
Total assets	$	774,729						$	696,898
Liabilities and stockholders’ equity
Interest bearing deposits	$	578,425	$	6,332		4.34	%	$	507,529	$	3,730		2.92	%
Other borrowings		48,621		692		5.65	%		38,145		551		5.73	%
Sub-total interest bearing liabilities		627,046		7,024		4.44	%		545,674		4,281		3.11	%
Non-interest bearing deposits		57,649							62,494
Other liabilities		2,486							2,413
Stockholders’ equity		87,548							80,712
Total liabilities and stockholders’ equity	$	774,729						$	696,898
Net interest income			$	6,846						$	7,053
Net interest rate spread						2.95	%						3.65	%
Net interest margin on earning assets						3.65	%						4.20	%

22

	Nine Months Ended							Nine Months Ended
	September 30, 2006							September 30, 2005
	Average				Average			Average				Average
(In thousands)	Balance		Interest		Rate			Balance		Interest		Rate
Assets
Interest-bearing deposits with banks	$	4,427	$	152		4.59	%	$	4,506	$	99		2.94	%
Federal funds sold		9,929		376		5.06	%		8,516		187		2.94	%
Investment securities, available for sale		15,849		519		4.38	%		20,123		425		2.82	%
Loans		688,178		38,129		7.41	%		621,286		31,153		6.70	%
Sub-total earning assets		718,383		39,176		7.29	%		654,431		31,864		6.51	%
Other assets		30,508							32,759
Total assets	$	748,891						$	687,190
Liabilities and stockholders’ equity
Interest bearing deposits	$	559,676	$	16,783		4.01	%	$	501,985	$	10,107		2.69	%
Other borrowings		41,908		1,735		5.54	%		41,643		1,459		4.68	%
Sub-total interest bearing liabilities		601,584		18,518		4.12	%		543,628		11,566		2.84	%
Non-interest bearing deposits		58,152							63,052
Other liabilities		2,128							2,168
Stockholders’ equity		87,027							78,342
Total liabilities and stockholders’ equity	$	748,891						$	687,190
Net interest income			$	20,658						$	20,298
Net interest rate spread						3.17	%						3.67	%
Net interest margin on earning assets						3.84	%						4.15	%

23

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
		2006/2005												2006/2005
		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	(	$	19	)		$	9		(	$	10	)		$	16		$	37	$	53
Federal funds sold			60				35				95				98			91		189
Investment securities, available for sale			(6	)			85				79				(65	)		159		94
Loans			1,462				910				2,372				4,789			2,187		6,976
Total earning assets		$	1,497		��	$	1,039			$	2,536			$	4,838		$	2,474	$	7,312
Liabilities
Interest bearing deposits		$	791			$	1,811			$	2,602			$	3,370		$	3,306	$	6,676
Other borrowings			149				(8	)			141				99			177		276
Total interest bearing liabilities		$	940			$	1,803			$	2,743			$	3,469		$	3,483	$	6,952
Net interest income									(	$	207	)							$	360
Net interest rate spread											(0.71	%	)							(0.49	%	)
Net interest margin on earning assets											(0.56	%	)							(0.30	%	)

24

Provision for Loan Losses

2006 Compared to 2005.The provision for loan losses was $470,000 and $782,000 for the three and nine month periods ended September 30, 2006, compared to $248,000 and $991,000 for the same periods in 2005, an increase of $222,000 or 90% for the three month period and a decrease of $209,000 or 21% for the nine month period. The provision for loan losses for the three and nine month periods ended September 30, 2006 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 for loan losses during the third quarter of 2006 was driven by loan growth of $45.0 million during that period compared to $9.3 million during the same period in 2005, partially offset by lower net charge-offs in 2006. The decrease in provision during 2006 was impacted by net recoveries during the nine months ended September 30, 2006 compared to net charge-offs during the same period in 2005.

Non-interest Income

2006 Compared to 2005.Non-interest income excluding the impairment charge in 2005 was $297,000 and $737,000 for the three and nine month periods ended September 30, 2006, compared to $305,000 and $412,000 for the same periods in 2005, an increase of $8,000 or 3% for three month period and $325,000 or 79% for the nine month period. The decrease during the three month period was primarily due to the decrease in the gain on the sale of loans during the period. The decrease in the gain on sale of loans was the result of decreased volume in residential lending activity during 2006. The decrease during the nine month period was primarily due to the decrease in the gain on the sale of real estate owned and the gain on the sale of loans during the period. The decrease in the gain on the sale of real estate owned was due to the sale of three properties for a loss of $103,000 during the nine months ended September 30, 2006, compared to the sale of three properties for a gain of $92,000 during the same period in 2005. The decrease in the gain on sale of loans was the result of decreased volume in residential lending activity during 2006.

During the second quarter of 2005, the Corporation recognized an other than temporary impairment charge of $696,000 on a single issue of FHLMC Preferred Stock. This security was sold during the third quarter of 2005.

25

Non-interest Expense

2006 Compared to 2005.Non-interest expense was $4,301,000 and $12,177,000 for the three and nine month periods ended September 30, 2006, compared to $3,961,000 and $11,758,000 for the same periods in 2005, an increase of $340,000 or 9% for the three month period and $419,000 or 4% for the nine month period. The largest component of non-interest expense was salaries and employee benefits which amounted to $2,637,000 and $7,514,000 for the three month and nine month periods ended September 30, 2006, compared to $2,357,000 and $7,003,000 for the same periods in 2005, an increase of $280,000 or 12% for the three month period and $511,000 or 7% for the nine month period. The primary factor for the increase in salaries and benefits expense was the expansion of the commercial lending and retail banking departments. As of September 30, 2006, the number of full time equivalent employees was 156 compared to 147 as of September 30, 2005.

The second largest component of non-interest expense was occupancy and equipment expense. Occupancy and equipment expense amounted to $602,000 and $1,827,000 for the three and nine month periods ended September 30, 2006, compared to $628,000 and $1,875,000 for the same periods in 2005, a decrease of $26,000 or 4% for the three month period and $48,000 or 3% for the nine month period.

Income Tax Provision

2006 Compared to 2005.Income tax expense was $807,000 and $2,869,000 for the three and nine month periods ended September 30, 2006, compared to $1,070,000 and $2,705,000 for the same periods in 2005, a decrease of $263,000 or 25% for the three month period and an increase of $164,000 or 6% for the nine month period. The change in income tax provision is directly related to changes in pre-tax income as the effective tax rate has remained stable at approximately 34% for all periods.

26

Comparison of Financial Condition at September 30, 2006 and December 31, 2005

Assets.Total assets at September 30, 2006 were $787,799,000 compared to $706,497,000 at December 31, 2005, an increase of $81,302,000 or 12%. The increase was primarily due to the increase in loans during the period.

Federal Funds Sold.Total federal funds sold at September 30, 2006 were $9,093,000 compared to $2,268,000 at December 31, 2005, an increase of $6,825,000 or 301%. The increase was primarily due to additional funds received as a result of deposit gathering activities during the nine months ended September 30, 2006 and the redeployment of funds from the sale of securities, available for sale. These funds are invested into overnight investments until these funds can be deployed into loans.

Interest bearing deposits with banks.Total interest bearing deposits with banks at September 30, 2006 were $52,000 compared to $69,000 at December 31, 2005, a decrease of $17,000 or 25%. 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, 2006 were $1,096,000 compared to $1,041,000 at December 31, 2005, an increase of $55,000 or 5%. 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, 2006 were $5,837,000 compared to $17,153,000 at December 31, 2005, a decrease of $11,316,000 or 66%. The increase was due to the sale of securities, available for sale during 2006.

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 $17,000. The unrealized loss is reflected by an adjustment to stockholders’ equity.

Federal Home Loan Bank Stock.Federal Home Loan Bank stock was $1,290,000 at September 30, 2006 compared to $1,293,000 at December 31, 2005.

27

Loans.Total loans at September 30, 2006 were $741,030,000 compared to $657,037,000 at December 31, 2005, an increase of $83,993,000 or 13%. 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):

	09/30/06			12/31/05			09/30/05
Consumer loans	$	33,261		$	35,041		$	38,146
Commercial, financial, & other		127,024			110,805			128,996
Commercial real estate construction		133,201			118,358			97,924
Commercial real estate mortgages		402,008			345,536			334,660
Residential real estate mortgages		45,536			47,297			45,277
		741,030			657,037			645,003
Allowance for loan losses		(7,615	)		(6,808	)		(6,757	)
	$	733,415		$	650,229		$	638,246

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

	09/30/06		12/31/05		09/30/05
Over 90 days past due and still accruing	$	189	$	189	$	62
Non-accrual loans		4,602		984		944
Total non-performing loans		4,791		1,173		1,006
Real estate owned		52		661		661
Other repossessed assets		—		2		—
Other non-performing assets		52		663		661
Total non-performing assets	$	4,843	$	1,836	$	1,667

Non-accrual loans at September 30, 2006 were $4,602,000. The increase in non-accrual loans during the nine months ended September 30, 2006 is primarily due to the downgrading of one construction loan and three commercial real estate loans with a balance of $3,757,000 to non-accrual status. An impairment analysis was completed on these loans resulting in a specific allocation of the allowance for loan losses to these loans of 688,000 at September 30, 2006. The distribution of non-accrual loans by loan type is as follows:

	Number of
	Loans		Balance
Consumer loans		2	$	68
Commercial, financial, & other		1		300
Commercial real estate construction		1		945
Commercial real estate mortgages		6		3,062
Residential real estate mortgages		2		227
Total non-accrual loans		12	$	4,602

28

Allowance for Loan Losses.The allowance for loan losses was $7,615,000 at September 30, 2006 compared to $6,808,000 at December 31, 2005, an increase of $807,000 or 12%. The increase resulted primarily from provisions and net recoveries recorded during the nine month period ended September 30, 2006. 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
	09/30/06			12/31/05			09/30/05
Balance, beginning of year	$	6,808		$	5,884		$	5,884
Allowance on loans acquired		—			—			—
Charge-offs:
Consumer loans		—			112			105
Commercial, financial & other		40			169			122
Commercial real estate construction		—			—			—
Commercial real estate mortgages		36			86			86
Residential real estate mortgages		38			—			—
Recoveries:
Consumer loans		16			37			27
Commercial, financial & other		102			131			127
Commercial real estate construction		—			—			—
Commercial real estate mortgages		21			10			9
Residential real estate mortgages		—			32			32
Net charge-offs (recoveries)		(25	)		157			118
Additions charged to operations		782			1,081			991
Balance, end of period	$	7,615		$	6,808		$	6,757
Allowance to total loans		1.03	%		1.04	%		1.05	%
Allowance to nonperforming assets		157.24	%		370.81	%		405.34	%
Net charge-offs (recoveries) to average loans		0.00	%		0.02	%		0.02	%

29

Premises and Equipment.Bank premises and equipment at September 30, 2006 were $14,173,000 compared to $13,792,000 at December 31, 2005, an increase of $381,000 or 3%. The increase in premises and equipment was primarily due to purchase of a building in Shelby Township, Michigan. This building will be renovated and opened as a full service branch office during the fourth quarter of 2006.

Real estate owned.Real estate owned at September 30, 2006 was $52,000 compared to $663,000 at December 31, 2005.

Goodwill and other intangible assets.Goodwill and other intangible assets were $7,576,000 at September 30, 2006 compared to $7,764,000 at December 31, 2005. The Bank has intangible assets for the estimated value of core deposit accounts and borrower 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 was valued at $929,000 and is being amortized over a period of ten years. The borrower relationship intangible was valued to $1,620,000 and is being amortized over a period of 17 years. At September 30, 2006, the core deposit intangible and borrower relationship intangible amounted to $657,000 and $1,446,000, respectively.

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. There was no impairment at December 31, 2005, when goodwill was most recently tested for impairment.

Accrued Interest Receivable.Accrued interest receivable at September 30, 2006 was $2,868,000 compared to $2,586,000 at December 31, 2005, an increase of $282,000 or 11%. The increase was primarily due to the increase in the Bank’s loan portfolio.

Other Assets. Other assets at September 30, 2006 were $3,372,000 compared to $2,521,000 at December 31, 2005, an increase of $851,000 or 34%. The decrease was primarily due to changes in deferred tax assets.

30

Deposits.Total deposits at September 30, 2006 were $651,111,000 compared to $582,438,000 at December 31, 2005, an increase of $68,673,000 or 12%. The following is a summary of the distribution of deposits (in thousands):

	09/30/06		12/31/05		09/30/05
Non-interest bearing:
Demand	$	54,292	$	59,652	$	60,222
Interest bearing:
Checking	$	101,587	$	13,413	$	15,286
Money market		14,928		26,514		38,118
Savings		45,004		69,503		74,687
Time, under $100,000		128,834		151,038		140,639
Time, $100,000 and over		306,466		262,318		245,002
		596,819		522,786		513,732
Total deposits	$	651,111	$	582,438	$	573,954

Management continues to implement a strategy to change the mix of the deposit portfolio by focusing more heavily on savings, checking and institutional deposits. 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 2006 that highlighted the Bank’s Anniversary and the introduction and promotion of an interest checking product in February 2006. Management expects deposits to grow at a more moderate rate during the remainder of 2006.

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):

	09/30/06		12/31/05		09/30/05
Interest bearing checking	$	1,008	$	1,020	$	1,380
Time, $100,000 and over		101,259		85,236		81,264
Total municipal deposits	$	102,267	$	86,256	$	82,644

Brokered deposits are included in the Time, $100,000 and over category. Brokered deposits were $56,018,000, $45,100,000 and $35,640,000 at September 30, 2006, December 31, 2005 and September 30, 2005, respectively.

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Federal Funds Purchased.Federal funds purchased at September 30, 2006 were $10,200,000 compared to $0 at December 31, 2005. The Bank has several federal funds lines of credit with correspondent banks 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, 2006 were $631,000 compared to $1,615,000 at December 31, 2005, a decrease of $984,000 or 61%. These repurchase agreements are secured by securities held by the Bank.

Federal Home Loan Bank Advances. Federal Home Loan Bank advances at September 30, 2006 were $25,561,000 compared to $25,588,000 at December 31, 2005, a decrease of $27,000. The decrease was due to a scheduled repayment during the third quarter of 2006.

Accrued Interest Payable. Accrued interest payable at September 30, 2006 was $2,508,000 compared to $1,683,000 at December 31, 2005, an increase of $825,000 or 49%. The increase was primarily due to the increasing amount and cost of interest bearing deposits during the period.

Other Liabilities. Other liabilities at September 30, 2006 were $421,000 compared to $960,000 at December 31, 2005, a decrease of $539,000 or 56%. 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, 2006 and December 31, 2005.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 subsidiary 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 $262,000 at September 30, 2006.

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Capital

Stockholders’ equity at September 30, 2006 was $87,367,000 compared to $84,213,000 as of December 31, 2005, an increase of $3,154,000 or 4%. The increase in capital was primarily due net income during the period and partially offset by the repurchase of common stock under a stock repurchase plan.

The Corporation’s Board of Directors approved a stock repurchase plan that authorized the repurchase of up to 262,500 shares of the Corporation’s common stock on March 21, 2006. The Corporation repurchased 122,700 shares of its common stock at an average price of $22.96 during 2006 under this plan.

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, 2006
Total capital
(to risk weighted assets)
Consolidated	$	97,418		12.69	%	$	61,438		8.00	%	$	76,797		10.00	%
Bank		83,022		10.87	%		61,085		8.00	%		76,357		10.00	%
Tier 1 capital
(to risk weighted assets)
Consolidated		89,803		11.69	%		30,719		4.00	%		46,078		6.00	%
Bank		75,407		9.88	%		30,543		4.00	%		45,814		6.00	%
Tier 1 capital
(to average assets)
Consolidated		89,803		11.59	%		30,686		4.00	%		38,358		5.00	%
Bank		75,407		10.02	%		30,099		4.00	%		37,624		5.00	%
As of December 31, 2005
Total capital
(to risk weighted assets)
Consolidated	$	93,281		13.29	%	$	56,147		8.00	%	$	70,184		10.00	%
Bank		75,918		10.89	%		55,756		8.00	%		69,695		10.00	%
Tier 1 capital
(to risk weighted assets)
Consolidated		86,472		12.32	%		28,073		4.00	%		42,110		6.00	%
Bank		69,109		9.92	%		27,878		4.00	%		41,817		6.00	%
Tier 1 capital
(to average assets)
Consolidated		86,472		12.32	%		28,074		4.00	%		35,092		5.00	%
Bank		69,109		10.09	%		27,400		4.00	%		34,250		5.00	%

Based on the respective regulatory capital ratios at September 30, 2006 and December 31, 2005, 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, 2006, 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	$	9,093		$	—		$	—	$	—	$	9,093
Interest bearing deposits with banks		52			—			—		—		52
Mortgage loans held for sale		1,096			—			—		—		1,096
Securities available for sale		997			1,988			2,681		171		5,837
Federal Home Loan Bank stock		1,290			—			—		—		1,290
Total loans, net of non-accrual		262,005			45,415			392,715		36,292		736,427
Total earning assets		274,533			47,403			395,396		36,463		753,795
Interest bearing liabilities
Total interest bearing deposits		282,071			244,031			70,717		—		596,819
Federal Home Loan Bank advances		10,000			—			15,561		—		25,561
Federal funds purchased		10,200			—			—		—		10,200
Other borrowings		631			—			—		—		631
Subordinated debentures		10,000			—			—		—		10,000
Total interest bearing liabilities		312,902			244,031			86,278		—		643,211
Net asset (liability) funding gap		(38,369	)		(196,628	)		309,118		36,463	$	110,584
Cumulative net asset (liability) funding gap	($	38,369	)	($	234,997	)	$	74,121	$	110,584

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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, 2006 (in thousands):

Contractual Obligations

	Payments Due By Period
	Less Than		1-3		3-5		Over 5
	1 Year		Years		Years		Years		Total
Securities sold under agreements to repurchase	$	631	$	—	$	—	$	—	$	631
Federal funds purchased	$	10,200		—		—		—		10,200
Certificates of deposit		364,584		42,230		28,486		—		435,300
Long-term borrowings		10,000		15,561		—		—		25,561
Lease commitments		524		900		729		54		2,207
Subordinated debentures		—		—		—		10,000		10,000
Totals	$	385,939	$	58,691	$	29,215	$	10,054	$	483,899

Unused Loan Commitments and Letters of Credit

	Amount Of Commitment Expiration Per Period
	Less Than		1-3		3-5		Over 5
	1 Year		Years		Years		Years		Total
Unused loan commitments	$	93,106	$	36,903	$	1,722	$	21,661	$	153,392
Standby letters of credit		2,362		6,017		—		—		8,379
Totals	$	95,468	$	42,920	$	1,722	$	21,661	$	161,771

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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, 2006.

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)	Three Form 8-K Reports, dated July 18, 2006, September 14, 2006 and September 22, 2006 were filed during the quarter ended September 30, 2006.

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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 8, 2006

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Exhibit Index

Exhibits	Description of Exhibit
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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