Dearborn Bancorp (DEAR) 10-Q 2007 Q2 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 endedJune 30, 2007.

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 July 31, 2007.

Class	Shares Outstanding
Common Stock	8,594,819

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 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 Securities 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 – June 30, 2007, December 31, 2006 and June 30, 2006	4
	Consolidated Statements of Income — For the Three and Six Months Ended June 30, 2007 and 2006	5
	Consolidated Statements of Comprehensive Income — For the Three and Six Months Ended June 30, 2007 and 2006	6
	Consolidated Statements of Cash Flows — For the Three and Six Months Ended June 30, 2007 and 2006	7
	Notes to Consolidated Financial Statements	9-16
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 4. Submission of Matters to a Vote of Security Holders	38
	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 5 Other Information
SIGNATURES		39
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Financial Officer
Section 906 Certification of Chief Executive Officer
Section 906 Certification of Chief Financial Officer

2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have reviewed the consolidated balance sheets of Dearborn Bancorp, Inc. (“the Corporation”) as of June 30, 2007 and the related consolidated statements of income and comprehensive income for the three and six month periods ended June 30, 2007 and the related consolidated statements of cash flows for the six month periods ended June 30, 2007 and 2006. These interim financial statements are the responsibility of the Corporation’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
August 8, 2007

3

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (unaudited)

(Dollars, in thousands)	06/30/07			12/31/06			06/30/06
ASSETS
Cash and cash equivalents
Cash and due from banks	$	13,621		$	5,824		$	8,091
Federal funds sold		3,392			64,198			8,520
Interest bearing deposits with banks		104			8			107
Total cash and cash equivalents		17,117			70,030			16,718
Mortgage loans held for sale		1,136			1,823			1,174
Securities, available for sale		11,039			5,878			27,038
Federal Home Loan Bank stock		1,927			1,288			1,293
Loans
Loans		945,554			756,420			696,052
Allowance for loan loss		(9,949	)		(7,775	)		(7,154	)
Net loans		935,605			748,645			688,898
Premises and equipment, net		23,268			14,293			14,092
Real estate owned		3,008			52			—
Goodwill		32,110			5,473			5,473
Other intangible assets		13,697			2,041			2,166
Accrued interest receivable		3,833			3,337			2,652
Other assets		3,464			3,071			2,986
Total assets	$	1,046,204		$	855,931		$	762,490
LIABILITIES
Deposits
Non-interest bearing deposits	$	103,641		$	53,065		$	59,976
Interest bearing deposits		727,090			580,151			552,294
Total deposits		830,731			633,216			612,270
Other liabilities
Federal funds purchased		21,200			37,300			24,500
Securities sold under agreements to repurchase		288			619			310
Federal Home Loan Bank advances		37,130			25,561			25,588
Other liabilities		757			516			260
Accrued interest payable		3,336			3,734			1,912
Subordinated debentures		10,000			10,000			10,000
Total liabilities		903,442			710,946			674,840
STOCKHOLDERS’ EQUITY
Common stock - 20,000,000 shares authorized; outstanding:
8,614,819 shares at 06/30/07, 8,975,085 shares at 12/31/06; and 5,961,795 shares at 06/30/06		138,230			144,907			87,224
Retained earnings		4,530			84			460
Accumulated other comprehensive income (loss)		2			(6	)		(34	)
Total stockholders’ equity		142,762			144,985			87,650
Total liabilities and stockholders’ equity	$	1,046,204		$	855,931		$	762,490

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

4

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(In thousands, except share and per share data)	Three Months Ended						Six Months Ended
	06/30/07			06/30/06			06/30/07			06/30/06
Interest income
Interest on loans, including fees	$	17,259		$	12,678		$	34,384		$	24,624
Interest on securities, available for sale		163			152			341			315
Interest on federal funds		109			153			277			221
Interest on deposits with banks		42			79			42			146
Total interest income		17,573			13,062			35,044			25,306
Interest expense
Interest on deposits		8,246			5,578			16,024			10,451
Interest on other borrowings		507			313			1,311			633
Interest on subordinated debentures		225			215			465			410
Total interest expense		8,978			6,106			17,800			11,494
Net interest income		8,595			6,956			17,244			13,812
Provision for loan losses		289			155			906			312
Net interest income after provision for loan losses		8,306			6,801			16,338			13,500
Non-interest income
Service charges on deposit accounts		331			166			649			323
Fees for other services to customers		15			13			69			26
Gain on the sale of loans		47			68			101			110
Write-down of real estate		(100	)		—			(100	)
Gain (loss) on the sale of real estate		—			(49	)		—			(103	)
Other income		64			8			83			19
Total non-interest income		357			206			802			375
Non-interest expense
Salaries and employee benefits		3,102			2,445			6,654			4,877
Occupancy and equipment expense		887			595			1,845			1,225
Amortization of intangible assets		336			62			672			125
Advertising and marketing		143			113			220			201
Stationery and supplies		232			89			356			161
Professional services		222			175			486			358
Data processing		204			131			328			256
Other operating expenses		453			282			1,005			608
Total non-interest expense		5,579			3,892			11,566			7,811
Income before income taxes		3,084			3,115			5,574			6,064
Income tax expense		1,079			1,059			1,951			2,062
Net income	$	2,005		$	2,056		$	3,623		$	4,002
Per share data:
Net income — basic	$	0.23		$	0.34		$	0.41		$	0.67
Net income — diluted	$	0.22		$	0.33		$	0.40		$	0.64
Weighted average number of shares outstanding — basic		8,769,939			5,989,232			8,833,645			5,985,823
Weighted average number of shares outstanding — diluted		9,005,730			6,292,544			9,085,837			6,298,182

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

5

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(In thousands)	Three Months Ended						Six Months Ended
	06/30/07			06/30/06			06/30/07			06/30/06
Net income	$	2,005		$	2,056		$	3,623		$	4,002
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during period		(5	)		4			11			15
Less: reclassification adjustment for losses included in net income		—			—			—			—
Tax effects		2			(1	)		(3	)		(5	)
Other comprehensive income/(loss)		(3	)		3			8			10
Comprehensive income	$	2,002		$	2,059		$	3,631		$	4,012

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

6

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)	Six Months Ended
	6/30/2007			6/30/2006
Cash flows from operating activities
Interest and fees received	$	34,548		$	25,240
Interest paid		(18,198	)		(11,264	)
Proceeds from sale of mortgages held for sale		11,303			11,517
Origination of mortgages held for sale		(10,515	)		(11,475	)
Taxes paid		(1,830	)		(2,700	)
Gain (loss) on sale of real estate owned		—			(103	)
Cash paid to suppliers and employees		(12,768	)		(6,736	)
Net cash from operating activities		2,540			4,479
Cash flows from investing activities
Proceeds from the sale of securities available for sale		18,007			—
Proceeds from calls, maturities and repayments of of securities available for sale		2,358			8,783
Purchases of securities available for sale		(25,428	)		(18,621	)
Purchase of Federal Home Loan Bank stock		(639	)		—
Increase in loans, net of payments received		(10,017	)		(38,981	)
Purchases of property and equipment		(4,966	)		(774	)
Net cash paid in Fidelity acquisition		(32,111	)		—
Net cash from investing activities		(52,796	)		(49,593	)
Cash flows from financing activities
Net increase (decrease) in non-interest bearing deposits		4,568			324
Net increase in interest bearing deposits		5,400			29,508
Increase (decrease) in other borrowings		(331	)		(1,305	)
Net increase (decrease) in federal funds purchased		(16,100	)		24,500
Proceeds from Federal Home Loan Bank advances		9,802			—
Purchase of common stock		(6,263	)		(878	)
Exercise of stock options		58			170
Tax benefit of stock options exercised		209			58
Net cash from financing activities		(2,657	)		52,377
Increase (decrease) in cash and cash equivalents		(52,913	)		7,263
Cash and cash equivalents at the beginning of the period		70,030			9,455
Cash and cash equivalents at the end of the period	$	17,117		$	16,718

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

7

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands)	Six Months Ended
	6/30/2007			6/30/2006
Reconciliation of net income to net cash provided by operating activities
Net income	$	3,623		$	4,002
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		906			312
Depreciation and amortization expense		703			474
Restricted stock award expense		98			52
Stock option expense		44			23
Accretion of discount on securities		(88	)		(39	)
Amortization of premium on securities		—			7
Amortization of intangible assets		672			125
(Increase) decrease in mortgages held for sale		687			(133	)
(Increase) decrease in interest receivable		748			(66	)
(Increase) decrease in other assets		(2,402	)		193
Increase (decrease) in interest payable		(735	)		229
Decrease in other liabilities		(1,716	)		(700	)
Net cash provided by operating activities	$	2,540		$	4,479
Supplemental noncash disclosures:
Transfers from loans to real estate owned	$	2,525		$	39
Noncash investing activities:
Fidelity Bank acquisition:
Loans acquired		178,052			—
Bank premises and equipment		9,214			—
Acquisition intangibles recorded		34,172			—
Other assets acquired		2,194			—
Deposits assumed		(187,459	)		—
Borrowings assumed		(1,767	)		—
Other liabilities assumed		(2,295	)		—
	$	32,111			—

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

8

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

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, Fidelity Bank (the “Bank”), formerly known as Community Bank of Dearborn. As discussed in Note D, the Corporation acquired Fidelity Financial Corporation of Michigan and its subsidiary, Fidelity Bank. As a result of the acquisition, Fidelity Bank was merged into the Corporation’s subsidiary. On April 30, 2007, Community Bank of Dearborn was renamed Fidelity 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 June 30, 2007 and 2006, and December 31, 2006 and for the three and six month periods ended June 30, 2007 and 2006 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 three and six month periods ended June 30, 2007 are not necessarily indicative of results of operations for the entire year.
	The consolidated financial statements as of June 30, 2007 and 2006, and for the three and six months ended June 30, 2007 and 2006 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 annual 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 thereto included in the Corporation’s 2006 Annual Report on Form 10-K.
	Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these material judgments include, but without limitation, changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and determining the fair value of securities and other financial instruments and assessing other than temporary impairments of securities.

9

A.	Accounting and Reporting Policies (con’t)
	Income Per Share
	Basic income per share is net income divided by the weighted average number of common shares outstanding during the period. Diluted income per share includes the dilutive effect of unvested stock awards and additional potential common shares issuable under stock options. Income per share is restated for all stock splits and dividends through the date of issue of the financial statements.
	Stock options for 35,244 and 17,463 shares of common stock were not considered in computing diluted earnings per common share for the six months ended June 30, 2007 and 2006, respectively, because they were antidilutive. Stock options for 17,781 and 16,633 shares of common stock were not considered in computing diluted earnings per common share for the three months ended June 30, 2007 and 2006, respectively because they were antidilutive. All share and per share amounts have been adjusted for stock dividends.
	Effect of Newly Issued Accounting Standards
	The Financial Accounting Standards Board (“FASB”) Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), was adopted as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more than likely than not” test, no tax benefit is recorded. The adoption had no material affect on the Corporation’s consolidated financial statements. The Corporation is no longer subject to examination by federal taxing authorities for years before 2003.

10

	Effect of Newly Issued but not yet Effective Accounting Standards
	In February 2006, FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Liabilities” (“SFAS 159”). Adoption of SFAS 159 is required for January 1, 2008. Early adoption was allowed, effective to January 1, 2007, if that election was made by April 30, 2007. This statement allows, but does not require, companies to record certain assets and liabilities at their fair value. The fair value determination is made at the instrument level, so similar assets or liabilities could be partially accounted for using the historical cost method, while other similar assets or liabilities are accounted for using the fair value method. Changes in fair value are recorded through the income statement in subsequent periods. The statement provides for a one time opportunity to transfer existing assets and liabilities to fair value at the point of adoption with a cumulative effect adjustment recorded against equity. After adoption, the election to report assets or liabilities at fair value must be made at the point of their inception. The Corporation did not elect early adoption of SFAS 159 and has not yet determined which, if any, assets or liabilities may be reported using the fair value accounting method. As such, the Corporation has not yet determined the impact that the adoption of this statement may have on the Corporation’s consolidated financial statements.
B.	Securities Available For Sale
	The amortized cost and fair value of securities available for sale are as follows (in thousands):

	June 30, 2007
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
US Treasury securities	$	9,927	$	3	$	(5	)	$	9,925
Municipal bonds		759		4		—			763
Mortgage backed securities		351		—		—			351
Totals	$	11,037	$	7	$	(5	)	$	11,039

	December 31, 2006
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
US Treasury securities	$	4,982	$	—	$	(14	)	$	4,968
Municipal bonds		497		4		—			501
Mortgage backed securities		407		2		—			409
Totals	$	5,886	$	6	$	(14	)	$	5,878

11

B.	Securities Available For Sale (con’t)
	The amortized cost and fair value of securities available for sale at June 30, 2007 by contractual maturity are shown below (in thousands):

	Amortized		Fair
	Cost		Value
Due in less than three months	$	4,225	$	4,228
Due in three months through one year		5,702		5,697
Due in one year through five years		759		763
Mortgage backed securities		351		351
Totals	$	11,037	$	11,039

The entire portfolio has a net unrealized gain of $2,000 at June 30, 2007. Securities with unrealized losses at June 30, 2007, aggregated by investment category and the length of time that the securities have been in a continuous loss position, are as follows (in thousands):

Investment category	Fair Value		Unrealized Loss
US treasury securities	$	2,988	$	4
Mortgage backed securities		201		1
Total temporarily impaired	$	2,988	$	5

Length of time in a continuous loss position	Fair Value		Unrealized Loss
Less than one year	$	1,996	$	4
One to three years		992		1
Total temporarily impaired	$	2,988	$	5

Unrealized losses on securities, available for sale at June 30, 2007 have not been recognized 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 believed to be largely due to changes in interest rates. The fair value is expected to recover as the bonds approach their maturity date.

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

12

C.	Incentive Stock Plans
	Incentive stock awards have been granted to officers and employees under two Incentive Stock Plans. The first plan is the 1994 Stock Option Plan. Options to buy common stock have been granted to officers and employees under the 1994 Stock Option Plan, which provides for issue of up to 814,449 shares. Exercise price is the market price at date of grant. The maximum option term is ten years, and options vest fully after six months from the date of grant.
	A summary of the option activity in the 1994 Plan follows:

						Weighted
		Available					Average
	for		Options			Exercise
	Grant		Outstanding			Price
Outstanding at January 1, 2007		—		468,423		$	8.16
Exercised		—		(13,337	)		4.44
Outstanding at June 30, 2007		—		455,086		$	8.27

For the options outstanding at June 30, 2007, the range of exercise prices was $4.18 to $14.65 per share with a weighted-average remaining contractual term of 4.0 years. At June 30, 2007, 455,086 options were exercisable at weighted average exercise price of $8.27 per share. The intrinsic value of options exercised during the year was approximately $193,000 and the intrinsic value of options outstanding at June 30, 2007 was approximately $3,950,000.

During 2005, the Corporation initiated the 2005 Long-Term Incentive Plan. Under this plan, up to 347,248 shares may be granted to officers and employees of the Bank. This plan provides that stock awards may take the form of any combination of options, restricted shares, restricted share units or performance awards.

The administration of the plan, including the granting of awards and the nature of those awards, is determined by the Corporation’s Compensation Committee. The Corporation’s Board of Directors approved grants of stock options and restricted stock in 2005 and 2006. 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 awards. 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. At June 30, 2007, there were 35,251 stock options granted with a weighted average exercise price of $21.83. These options are eligible to vest fully three years from grant date.
	The Corporation recognized stock option compensation expense of $44,000 and $23,000 during the six months ended June 30, 2007 and 2006, respectively.
	Restricted Stock Grants — Restricted stock was awarded to officers in 2005 and 2006. The restricted stock is eligible to vest three years from grant date. At June 30, 2007, there were 23,956 shares of restricted stock outstanding.
	The Corporation recognized restricted stock compensation expense of $98,000 and $52,000 during the six months ended June 30, 2007 and 2006, respectively and a tax benefit of $34,000 and $18,000 during the six months ended June 30, 2007 and 2006, respectively.

14

D.	Acquisition
	On January 4, 2007, the Corporation acquired Fidelity Financial Corporation of Michigan and its subsidiary, Fidelity Bank (collectively “Fidelity”) for $70,500,000 in cash. Fidelity was founded in 1973 and has its main office in Birmingham, Michigan with single branch offices in Bloomfield Township, Michigan and Bingham Farms, Michigan and four branch offices in Southfield, Michigan. As of December 31, 2006, Fidelity had total assets of $220,419,000, gross loans of $179,553,000 and total deposits of $187,547,000. Fidelity’s results of operations are included in these financial statements since the date of acquisition.
	The acquisition of Fidelity will enable the Corporation to build a competitive presence in Oakland County for the Bank’s loan and deposit products. Management expects to build upon Fidelity’s reputation and continue to increase the Bank’s presence in Oakland County, while decreasing operating expenses by utilizing the infrastructure and operational capabilities already in place at the Bank.
	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. There are refinements in the process of allocating the purchase price that have not been entirely completed. 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 annually. Goodwill and other intangible assets are tax deductible over 15 years. Currently, identified intangible assets from the acquisition of Fidelity subject to amortization are $12,328,000. Goodwill from the acquisition of Fidelity aggregates to $26,637,000.
	The table displayed on the following page presents pro forma information for the Corporation including the acquisition of Fidelity for the three and six months ended June 30, 2006 as if the acquisition had occurred at the beginning of 2006. The pro forma financial information does not purport to be indicative of the operating results or financial position that would have actually occurred or existed if the transactions had occurred on the dates indicated, nor is it indicative of our future operating results or our financial position.

15

D. Acquisition (con’t)

	Three Months Ended		Six Months Ended
(In thousands, except share and per share data	06/30/06		06/30/06
Interest income	$	17,063	$	33,000
Interest expense		7,310		13,726
Net interest income		9,753		19,274
Provision for loan loss		245		472
Net interest income after provision for loan losses		9,508		18,802
Non-interest income	$	579		1,124
Non-interest expense		6,236		12,263
Income before income tax expense		3,851		7,663
Income tax expense		1,309		2,605
Net income	$	2,542	$	5,058
Basic earnings per share	$	0.28	$	0.56
Diluted earnings per share	$	0.27	$	0.54
Weighted average shares outstanding — basic		9,049,986		9,053,395
Weighted average shares outstanding — diluted		9,362,345		9,356,707

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

Company Overview

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

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

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

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

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

In September of 2006, the Corporation signed a definitive agreement to acquire Fidelity Financial Corporation of Michigan (Fidelity), a commercial bank with seven offices in Oakland County, Michigan. The acquisition significantly expands the Bank’s presence in Oakland County, Michigan. Management believes that the acquisition will be beneficial to the Bank’s customers and the Corporation’s shareholders. This acquisition was completed on January 4, 2007.

The Bank opened a full service banking office in Shelby Township, Michigan on April 30, 2007. The Bank currently operates twenty banking offices in Wayne, Macomb, Oakland and Washtenaw Counties, Michigan.

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 on the following page:

18

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

While maintaining satisfactory asset quality and maximizing profitability, the Bank has sustained substantial asset growth. The expansion of our commercial banking department has been a primary element in the Bank’s asset growth. This growth has been funded primarily by deposits. The Corporation expects to continue its growth in the Metropolitan Detroit market and look for additional acquisitions as they become available.

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

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

The Bank’s market area consists primarily of the Metropolitan Detroit area. This is a large real estate market and the Bank’s loan portfolio accounts for less than one percent of this market. The Detroit real estate market has been negatively impacted by the unfavorable economic conditions in the State of Michigan. Despite the local economy and its impact on certain industries, many local industries and economies are prospering. The Bank has maintained satisfactory asset quality in this environment by enforcing strong underwriting guidelines and utilizing a diligent loan review process.

Net income during the six months ended June 30, 2007 was affected by a compression in net interest income compared with the same period in 2006. 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 lower interest rates spreads than in other reporting periods. Other factors that decreased earnings during the period were the increases in the provision for loan losses and intangible asset amortization. The provision for loan losses was increased significantly during the period as a result of a higher level of non-performing loans. Intangible expense increased due to the amortization of intangible assets related to the acquisition of Fidelity.

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

19

Date Opened	Location	Type of office
February 1994	22290 Michigan Avenue Dearborn, Michigan 48123	Full service retail branch with ATM Regional lending certer
December 1995	24935 West Warren Avenue Dearborn Heights, Michigan 48127	Full service retail branch
August 1997	44623 Five Mile Road Plymouth, Michigan 48170	Full service retail branch with ATM
May 2001	1325 North Canton Center Road Canton, Michigan 48187	Full service retail branch with ATM
December 2001	45000 River Ridge Drive Clinton Township, Michigan 48038	Regional lending center
November 2002	19100 Hall Road Clinton Township, Michigan 48038	Full service retail branch with ATM
February 2003	12820 Fort Street Southgate, Michigan 48195	Full service retail branch with ATM
May 2003	3201 University Drive, Suite 180 Auburn Hills, Michigan 48326	Full service retail branch
October 2004	450 East Michigan Avenue Saline, MI 48176	Full service retail branch with ATM
October 2004	250 West Eisenhower Parkway Ann Arbor, MI 48103	Full service retail branch with ATM Regional lending certer
October 2004	2180 West Stadium Blvd. Ann Arbor, MI 48103	Full service retail branch with ATM
December 2004	1360 Porter Street Dearborn, MI 48123	Loan production office Regional lending center
January 2007	1040 E. Maple Birmingham, MI 48009	Full service retail branch with ATM Regional lending certer
January 2007	3681 W. Maple Birmingham, MI 48301	Full service retail branch with ATM
January 2007	30700 Telegraph Bingham Farms, Mi 48025	Full service retail branch with ATM
January 2007	20000 Twelve Mile Road Southfield, Mi 48076	Full service retail branch with ATM
January 2007	26555 Evergreen Southfield, Mi 48076	Full service retail branch with ATM
January 2007	200 Galleria Officenter Southfield, Mi 48034	Full service retail branch with ATM
January 2007	17117 W. Nine Mile Road Southfield, Mi 48075	Full service retail branch with ATM
April 2007	7755 23 Mile Road Shelby Township, MI 48316	Full service retail branch with ATM

20

Results of Operations

The Corporation reported net income of $2,005,000 and $3,623,000 for the three and six month periods ended June 30, 2007, compared to net income of $2,056,000 and $4,002,000 for the three and six month periods ended June 30, 2006, a decrease of $51,000 or 2% for the three month period and $379,000 or 9% for the six month period. The decrease in net income during the three and six month periods was primarily due to the decline in net interest margin, the increase in the provision for loan losses and the increase in various non-interest expenses that were primarily related to the acquisition of Fidelity.

Net Interest Income

2007 Compared to 2006.As noted on the two charts on the following pages, net interest income for the three month and six month periods ended June 30, 2007 was $8,595,000 and $17,244,000, compared to $6,956,000 and $13,812,000 for the same periods ended June 30, 2006, an increase of $1,639,000 or 24% for the three month period and $3,432,000 of 25% for the six month period. This increase was caused primarily by the volume of interest earning assets and interest bearing liabilities assumed as a result of the acquisition of Fidelity and partially offset by the declining net interest margin. The Corporation’s interest rate spread was 2.80% and 2.84% for the three month period and six month periods ended June 30, 2007, compared to 3.21% and 3.29% for the same periods in 2006. The Corporation’s net interest margin was 3.57% and 3.61% for the three and six month periods ended June 30, 2007, compared to 3.88% and 3.95% for the same periods in 2006.

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 June 30,							Three months ended June 30,
	2007							2006
	Average				Average			Average				Average
(In thousands)	Balance		Interest		Rate			Balance		Interest		Rate
Assets
Interest-bearing deposits with banks	$	3,570	$	42		4.72	%	$	7,286	$	79		4.35	%
Federal funds sold		8,344		109		5.24	%		12,159		153		5.05	%
Securities, available for sale		12,883		163		5.07	%		13,466		152		4.53	%
Loans		941,259		17,259		7.35	%		686,235		12,678		7.41	%
Total earning assets		966,056		17,573		7.30	%		719,146		13,062		7.29	%
Other assets		83,599							30,809
Total assets	$	1,049,655						$	749,955
Liabilities and stockholders’ equity
Interest bearing deposits	$	749,303	$	8,246		4.41	%	$	562,717	$	5,578		3.98	%
Other borrowings		51,699		732		5.68	%		38,045		528		5.57	%
Total interest bearing liabilities		801,002		8,978		4.50	%		600,762		6,106		4.08	%
Non-interest bearing deposits		99,918							59,013
Other liabilities		4,910							2,357
Stockholders’ equity		143,825							87,823
Total liabilities and stockholders’ equity	$	1,049,655						$	749,955
Net interest income			$	8,595						$	6,956
Net interest rate spread						2.80	%						3.21	%
Net interest margin on earning assets						3.57	%						3.88	%

22

	Six months ended June 30,							Six months ended June 30,
	2007							2006
	Average				Average			Average				Average
(In thousands)	Balance		Interest		Rate			Balance		Interest		Rate
Assets Interest-bearing deposits with banks	$	1,934	$	42		4.38	%	$	6,427	$	146		4.58	%
Federal funds sold		9,321		277		5.99	%		9,191		221		4.85	%
Securities, available for sale		13,657		341		5.04	%		15,053		315		4.22	%
Loans		938,786		34,384		7.39	%		674,979		24,624		7.36	%
Total earning assets		963,698		35,044		7.33	%		705,650		25,306		7.23	%
Other assets		80,859							30,083
Total assets	$	1,044,557						$	735,733
Liabilities and stockholders’ equity
Interest bearing deposits	$	737,350	$	16,024		4.38	%	$	550,146	$	10,451		3.83	%
Other borrowings		61,353		1,776		5.84	%		38,496		1,043		5.46	%
Total interest bearing liabilities		798,703		17,800		4.49	%		588,642		11,494		3.94	%
Non-interest bearing deposits		96,093							58,409
Other liabilities		4,693							1,950
Stockholders’ equity		145,068							86,732
Total liabilities and stockholders’ equity	$	1,044,557						$	735,733
Net interest income			$	17,244						$	13,812
Net interest rate spread						2.84	%						3.29	%
Net interest margin on earning assets						3.61	%						3.95	%

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 June 30,									Six Months Ended June 30.
	2007/2006									2007/2006
	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	$	(44	)		7		$	(37	)	$	(98	)	$	(6	)	$	(104	)
Federal funds sold		(50	)		6			(44	)		3			53			56
Investment securities, available for sale		(7	)		18			11			(38	)		64			26
Loans		4,676			(95	)		4,581			9,660			100			9,760
Total earning assets	$	4,575		$	(64	)	$	4,511		$	9,528		$	210		$	9,738
Liabilities
Interest bearing deposits	$	2,052			616		$	2,668		$	4,056		$	1,517		$	5,573
Other borrowings		193			11			204			661			72			733
Total interest bearing liabilities	$	2,245		$	627		$	2,872		$	4,717		$	1,589		$	6,306
Net interest income							$	1,639								$	3,432
Net interest rate spread								(0.41	%)								(0.46	%)
Net interest margin on earning assets								(0.31	%)								(0.34	%)

Provision for Loan Losses

2007 Compared to 2006.The provision for loan losses was $289,000 and $906,000 for the three and six month periods ended June 30, 2007, compared to $155,000 and $312,000 for the same periods in 2006, an increase of $134,000 or 86% for the three month period and $594,000 or 190% for the six month period. The provision for loan losses for the three and six month periods ended June 30, 2007 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 provision during 2007 was caused primarily by the increase in non-accrual loans during the period.

24

Non-interest Income

2007 Compared to 2006.Non-interest income was $357,000 and $802,000 for the three and six month periods ended June 30, 2007, compared to $206,000 and $375,000 for the same periods in 2006, an increase of $151,000 or 73% for the three month period and $427,000 or 114% for the six month period. The increase was primarily due to the increase in service charges on deposit accounts and other fees to customers. The increase in service charges on deposit accounts and other fees to customers was primarily due to the additional non-interest bearing accounts that were acquired as a result of the acquisition of Fidelity. The increase in the percentage of non-interest bearing accounts to total deposits from 8.40% to 12.5% was primarily due to the acquisition of Fidelity.

Non-interest Expense

2007 Compared to 2006.Non-interest expense was $5,579,000 and $11,566,000 for the three and six month periods ended June 30, 2007, compared to $3,892,000 and $7,811,000 for the same periods in 2006, an increase of $1,687,000 or 43% for the three month period and $3,755,000 or 48% for the six month period. The largest component of non-interest expense was salaries and employee benefits which amounted to $3,102,000 and $6,654,000 for the three and six month periods ended June 30, 2007, compared to $2,445,000 and $4,877,000 for the same periods in 2006. The primary factors for the increase in salaries and benefits expense was the acquisition of Fidelity and the opening of a branch office in Shelby Township, Michigan in April of 2007. As of June 30, 2007, the number of full time equivalent employees was 214 compared to 157 as of June 30, 2006. This increase is due to employees of Fidelity that were retained by the Bank. Salaries and employee benefits are expected to continue to increase as a result of general staff increases.

The second largest component of non-interest expense was occupancy and equipment expense. Occupancy and equipment expense amounted to $887,000 and $1,845,000 for the three and six month periods ended June 30, 2007, compared to $595,000 and $1,225,000 for the same periods in 2006, an increase of $292,000 or 49% for the three month period and $620,000 or 51% for the six month period. This increase is primarily due to the acquisition of Fidelity and its eight buildings.

Income Taxes

2007 Compared to 2006.The income tax expense was $1,079,000 and $1,951,000 for the three and six month periods ended June 30, 2007, compared to $1,059,000 and $2,062,000 for the same periods in 2006, an increase of $20,000 or 2% for the three month period and a decrease of $111,000 or 5% for the six month period. The increase in the three month period was primarily caused by an increase in the Corporation’s tax rate from 34% to 35%, which was partially offset by a decrease in pre-tax income. The decrease in the six month period was primarily a result of the decrease in pre-tax income.

25

Comparison of Financial Condition at June 30, 2007 and December 31, 2006

Assets.Total assets at June 30, 2007 were $1,046,204,000 compared to $855,931,000 at December 31, 2006, an increase of $190,293,000 or 22%. The increase was primarily due to the increase in loans, goodwill and other intangible assets, partially offset by the decrease in federal funds sold during the period as a result of the acquisition of Fidelity.

Federal Funds Sold.Total federal funds sold at June 30, 2007 were $3,392,000 compared to $64,198,000 at December 31, 2006, a decrease of $60,806,000 or 95%. The decrease in federal funds is the result of funding the acquisition of Fidelity during the period.

Interest bearing deposits with banks.Total interest bearing deposits with banks at June 30, 2007 were $104,000 compared to $8,000 at December 31, 2006, an increase of $96,000. 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. The increase in interest bearing deposits with banks is the result of normal operating activities.

Mortgage Loans Held for Sale.Total mortgage loans held for sale at June 30, 2007 were $1,136,000 compared to $1,823,000 at December 31, 2006, a decrease of $687,000 or 38%. This decrease was a result of the decrease in the level of residential real estate mortgage loans waiting to be purchased by mortgage correspondents.

Securities — Available for Sale.Total securities, available for sale, at June 30, 2007 were $11,039,000 compared to $5,878,000 at December 31, 2006, an increase of $5,161,000 or 88%. The increase was due to the acquisition of Fidelity and to collateralize certain government deposits.

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 gain of $2,000 at June 30, 2007. The unrealized gain is reflected by an adjustment to stockholders’ equity.

Federal Home Loan Bank Stock.Federal Home Loan Bank stock was carried at $1,927,000 at June 30, 2007 compared to $1,288,000 at December 31, 2006, an increase of $639,000 or 50%. The increase was due to acquisition of Fidelity.

26

Loans.Total loans at June 30, 2007 were $945,554,000 compared to $756,420,000 at December 31, 2006, an increase of $189,134,000 or 25%. The increase was primarily due to the acquisition of Fidelity and modest growth of the Bank’s loan portfolio during the past six months. Major categories of loans included in the loan portfolio are as follows (in thousands):

	06/30/07			12/31/06			06/30/06
Consumer loans	$	35,666		$	32,282		$	31,159
Commercial, financial, & other		187,707			130,056			116,089
Commercial real estate construction		136,437			135,306			126,538
Commercial real estate mortgages		534,140			410,829			376,970
Residential real estate mortgages		51,604			47,947			45,296
		945,554			756,420			696,052
Allowance for loan losses		(9,949	)		(7,775	)		(7,154	)
	$	935,605		$	748,645		$	688,898

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

	06/30/07		12/31/06		06/30/06
Over 90 days past due and still accruing	$	2,217	$	2,101	$	982
Non-accrual loans		14,941		5,560		3,982
Total non-performing loans		17,158		7,661		4,964
Real estate owned		3,008		52		—
Other repossessed assets		—		2		—
Other non-performing assets		3,008		54		—
Total non-performing assets	$	20,166	$	7,715	$	4,964

Non-accrual loans at June 30, 2007 were $14,941,000, compared to $5,560,000 at December 31, 2006. The increase in non-accrual loans during the year was primarily due to the downgrading of twenty-six commercial and construction loans for $12,132,000 and partially offset by the charge-off and transfer of two loans for $2,987,000 to real estate owned. There are 10 loans for $3,751,000 included in the downgraded loans that were acquired in the acquisition of Fidelity. The Bank’s impairment analysis indicated that the loans downgraded to non-accrual status during the period required a specific allowance in the allowance for loan losses of $946,000 at June 30, 2007. The distribution of non-accrual loans by loan type is as follows at June 30, 2007:

	Number of
	Loans		Balance
Consumer loans		5	$	405
Commercial, financial, & other		7		2,327
Commercial real estate mortgages		15		4,649
Commercial construction		13		7,286
Residential real estate mortgages		3		274
Total non-accrual loans		43	$	14,941

27

Allowance for Loan Losses.The allowance for loan losses was $9,949,000 at June 30, 2007 compared to $7,775,000 at December 31, 2006, an increase of $2,174,000 or 28%. The increase was primarily due to the acquisition of Fidelity and provisions made during the period. 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):

	Six Months
	Ended			Year Ended			Six Months Ended
	06/30/07			12/31/06			06/30/06
Balance, beginning of year	$	7,775		$	6,808		$	6,808
Allowance on loans acquired		1,704			—			—
Charge-offs:
Consumer loans		87			24			—
Commercial, financial & other		85			139			36
Commercial real estate construction		—			—			—
Commercial real estate mortgages		142			36			36
Residential real estate mortgages		320			38			10
Recoveries:
Consumer loans		5			17			9
Commercial, financial & other		174			218			88
Commercial real estate construction		—			—			—
Commercial real estate mortgages		19			26			19
Residential real estate mortgages		—			—			—
Net charge-offs (recoveries)		436			(24	)		(34	)
Additions charged to operations		906			943			312
Balance, end of period	$	9,949		$	7,775		$	7,154
Allowance to total loans		1.05	%		1.03	%		1.03	%
Allowance to nonperforming assets		49.34	%		100.78	%		144.12	%
Net charge-offs to average loans		0.05	%		0.00	%		0.05	%

28

Premises and Equipment.Premises and equipment at June 30, 2007 were $23,268,000 compared to $14,293,000 at December 31, 2006, an increase of $8,975,000 or 63%. The increase is primarily due to the acquisition of Fidelity. In addition, the Bank opened a branch office in Shelby Township, Michigan on April 30, 2007.

Real estate owned.Real estate owned at June 30, 2007 was $3,008,000 compared to $52,000 at December 31, 2006, an increase of $2,956,000 or 5685%. Real estate owned is carried at fair value and at June 30, 2007 is comprised of three residential properties, one commercial property and a development with nineteen building lots.

Goodwill and other intangible assets.Goodwill and other intangible assets were $45,807,000 at June 30, 2007 compared to $7,514,000 at December 31, 2006, an increase of $38,293,000 or 510%. Intangible assets represent the estimated value of core deposit accounts and borrower relationships acquired in the acquisitions of the Bank of Washtenaw and Fidelity. The intangible values represent the present value of the net revenue streams attributable to these intangibles. The gross carrying amount and accumulated amortization of these intangible assets at June 30, 2007 was as follows (in thousands):

	Gross
	Carrying		Accumulated
	Amount		Amortization
Core deposit intangible from acquisition of:
Bank of Washtenaw	$	929	$	350
Fidelity Financial Corporation of Michigan		8,776		440
Total core deposit intangible	$	9,705	$	790
Borrower relationship intangible from acquisition of:
Bank of Washtenaw	$	1,620	$	286
Fidelity Financial Corporation of Michigan		3,552		104
Total borrower relationship intangible	$	5,172	$	390
Total intangible assets	$	14,877	$	1,180

The core deposit intangible is being amortized over a period of ten years and the borrower relationship intangible is being amortized over a period of 17 years. At June 30, 2007, the core deposit intangible and borrower relationship intangible amounted to $8,915,000 and $4,782,000, 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 $32,110,000. 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 excess of the asset’s carrying value over its fair value. There was no impairment at December 31, 2006, when goodwill was most recently tested for impairment.

29

Accrued Interest Receivable.Accrued interest receivable at June 30, 2007 was $3,833,000 compared to $3,337,000 at December 31, 2006, an increase of $496,000 or 15%. The increase was primarily due to the increase in the Bank’s loan portfolio as a result of the acquisition of Fidelity.

Other Assets. Other assets at June 30, 2007 were $3,464,000 compared to $3,071,000 at December 31, 2006, an increase of $393,000 or 13%. The increase was primarily due to changes in deferred tax assets.

30

Deposits.Total deposits at June 30, 2007 were $830,731,000 compared to $633,216,000 at December 31, 2006, an increase of $197,515,000 or 31%. The following is a summary of the distribution of deposits (in thousands):

	06/30/07		12/31/06		06/30/06
Non-interest bearing:
Demand	$	103,641	$	53,065	$	59,976
Interest bearing:
Checking	$	71,454	$	62,770	$	107,107
Money market		121,795		14,289		21,071
Savings		35,097		42,169		47,021
Time, under $100,000		158,689		130,898		138,088
Time, $100,000 and over		340,055		330,025		239,007
		727,090		580,151		552,294
Total deposits	$	830,731	$	633,216	$	612,270

Management continues to implement a strategy to change the mix of the deposit portfolio by focusing more heavily on transaction accounts and institutional deposits. The increase in deposits was primarily due to the acquisition of Fidelity. Additional growth of $10,056,000 was due to normal business development, marketing, telemarketing, referral programs and growth strategies which included a weeklong celebration in March 2007 that highlighted the Bank’s Anniversary and the promotion of a short term time deposit product. Management expects deposits to continue to grow at a similar rate during the remainder of 2007.

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 bearing 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):

	06/30/07		12/31/06		06/30/06
Interest bearing checking	$	2,318	$	889	$	895
Time, $100,000 and over		92,044		115,362		62,571
Total municipal deposits	$	94,362	$	116,251	$	63,466

Brokered deposits are included in the Time, $100,000 and over category. Brokered deposits were $53,737,000, $56,000,000 and $22,290,000 at June 30, 2007, December 31, 2006 and June 30, 2006, respectively.

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Federal Funds Purchased. Federal funds purchased were $21,200,000 at June 30, 2007, compared to $37,300,000 at December 31, 2006, a decrease of $16,100,000 or 43%. The Bank maintains federal funds purchase credit facilities with several financial institutions as additional sources of funds that the Bank may utilize for short-term liquidity purposes.

Securities Sold Under Agreement to Repurchase. Securities sold under agreements to repurchase at June 30, 2007 were $288,000 compared to $619,000 at December 31, 2006, a decrease of $331,000 or 53%. These repurchase agreements are secured by securities held by the Bank.

Federal Home Loan Bank Advances. Federal Home Loan Bank advances were $37,130,000 at June 30, 2007 compared to $25,561,000 at December 31, 2006, an increase of $11,569,000 or 45%. The increase was primarily due to the borrowing of an additional advance by the Bank during the period and the acquisition of additional advances as a result of the acquisition of Fidelity.

Accrued Interest Payable. Accrued interest payable at June 30, 2007 was $3,336,000 compared to $3,734,000 at December 31, 2006, a decrease of $398,000 or 11%. The decrease was primarily due to the change in the payment frequency of the deposit portfolio subsequent to the acquisition of Fidelity.

Other Liabilities. Other liabilities at June 30, 2007 were $757,000 compared to $516,000 at December 31, 2006, an increase of $241,000 or 47%. The increase was primarily due to the increase in expenses payable during the period.

Subordinated Debentures. Subordinated debentures were $10,000,000 at June 30, 2007 and December 31, 2006.On December 19, 2002, the Corporation issued $10,000,000 of floating rate 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 could 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 $131,000 at June 30, 2007.

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Capital

Stockholders’ equity at June 30, 2007 was $142,762,000 compared to $144,985,000 as of December 31, 2006, a decrease of $2,223,000 or 2%. The decrease was primarily due to the repurchase of 373,000 common shares by the Corporation during the period, which was partially offset by net income during the period.

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
As of June 30, 2007
Total capital
(to risk weighted assets)
Consolidated	$	116,902	11.93	%	$	78,387	8.00	%		N/A	N/A
Bank		111,234	11.40	%		78,088	8.00	%	$	97,610	10.00	%
Tier 1 capital
(to risk weighted assets)
Consolidated		106,953	10.92	%		39,193	4.00	%		N/A	N/A
Bank		101,285	10.38	%		39,044	4.00	%		58,566	6.00	%
Tier 1 capital
(to average assets)
Consolidated		106,953	10.66	%		40,145	4.00	%		N/A	N/A
Bank		101,285	10.16	%		39,887	4.00	%		49,858	5.00	%
As of December 31, 2006
Total capital
(to risk weighted assets)
Consolidated	$	155,252	19.69	%	$	63,066	8.00	%		N/A	N/A
Bank		85,451	11.06	%		61,826	8.00	%	$	77,283	10.00	%
Tier 1 capital
(to risk weighted assets)
Consolidated		147,477	18.71	%		31,533	4.00	%		N/A	N/A
Bank		77,676	10.05	%		30,913	4.00	%		46,370	6.00	%
Tier 1 capital
(to average assets)
Consolidated		147,477	18.12	%		32,555	4.00	%		N/A	N/A
Bank		77,676	10.11	%		30,739	4.00	%		38,424	5.00	%

Based on the respective regulatory capital ratios at June 30, 2007 and December 31, 2006, the Corporation and Bank are considered well capitalized.

33

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 June 30, 2007, which are expected to mature or reprice in each of the time periods shown below.

	Interest Rate Sensitivity Period
(In thousands)	1-90			91-365			1-5		Over
	Days			Days			Years		5 Years		Total
Earning assets
Federal funds sold	$	3,392		$	—		$	—	$	—	$	3,392
Interest bearing deposits with Banks		104			—			—		—		104
Mortgage loans held for sale		1,136			—			—		—		1,136
Securities available for sale		2,300			7,624			965		150		11,039
Federal Home Loan Bank stock		1,927			—			—		—		1,927
Total loans, net of non-accrual		281,308			89,175			518,687		41,443		930,613
Total earning assets		290,167			96,799			519,652		41,593		948,211
Interest bearing liabilities
Total interest bearing deposits		474,304			193,994			58,544		248		727,090
Federal Home Loan Bank advances		561			10,394			26,175		—		37,130
Other Borrowings		21,488			—			—		—		21,488
Trust preferred securities		10,000			—			—		—		10,000
Total interest bearing liabilities		506,353			204,388			84,719		—		795,708
Net asset (liability) funding gap		(216,186	)		(107,589	)		434,933		41,345	$	152,503
Cumulative net asset (liability) funding gap	$	(216,186	)	$	(323,775	)	$	111,158	$	152,503

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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 June 30, 2007 (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	$	288	$	—	$	—	$	—	$	288
Certificates of deposit		439,952		38,963		19,581		248		498,744
Long-term borrowings		10,955		25,323		852		—		37,130
Lease commitments		774		1,413		655		—		2,842
Subordinated debentures		—		—		—		10,000		10,000
Totals	$	451,969	$	65,699	$	21,088	$	10,248	$	549,004

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	$	122,311	$	19,383	$	4,171	$	20,060	$	165,925
Standby letters of credit		5,232		4,135		—		—		9,367
Totals	$	127,543	$	23,518	$	4,171	$	20,060	$	175,292

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

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 June 30, 2007.

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.

37

PART II — OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

The Corporation held its regular annual meeting of stockholders on May 15, 2007. The first matter for consideration was the re-election of directors. Four directors were re-elected to serve three year terms expiring in 2009. The voting results were as follows:

Nominee	Total For
Margaret I. Campbell		8,094,127
John E. Demmer		7,124,772
Michael V. Dorian Jr.		8,091,447
Donald G. Karcher		7,085,393

The second matter for consideration was the proposed amendment to the Articles of Incorporation to increase the number of authorized shares of Common Stock from 10,000,000 shares to 20,000,000 shares. The amendment passed as 7,651,774 votes were cash in favor of the amendment. The votes cast in favor of the proposal represents approximately 88% of the total votes cast.

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)	A Form 8-K Report, dated April 18, 2007 was filed during the quarter ended June 30, 2007.
	A Form 8-K Report, dated April 19, 2007 was filed during the quarter ended June 30, 2007.
	A Form 8-K Report, dated April 26, 2007 was filed during the quarter ended June 30, 2007.
	A Form 8-K Report, dated May 15, 2007 was filed during the quarter ended June 30, 2007.

38

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

SIGNATURES

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

Dearborn Bancorp, Inc.
(Registrant)

/s/ John E. Demmer

John E. Demmer

Chairman

/s/ Michael J. Ross

Michael J. Ross

President and Chief Executive Officer

/s/ Jeffrey L. Karafa

Jeffrey L. Karafa

Treasurer and Chief Financial Officer

Date: August 9, 2007

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