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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly period endedSeptember 30, 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 October 31, 2007.
Class | Shares Outstanding | |
Common Stock | 8,431,913 |
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
INDEX
Page | ||||||||
Item 1. Financial Statements | ||||||||
The following consolidated financial statements of Dearborn Bancorp, Inc. and its subsidiary included in this report are: | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
9-18 | ||||||||
19-36 | ||||||||
37-39 | ||||||||
40 | ||||||||
Pursuant to SEC rules and regulations, the following item(s) are included with the Form 10-Q Report: | ||||||||
41 | ||||||||
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 | ||||||||
42 | ||||||||
Section 302 CEO Certification | ||||||||
Section 302 CFO Certification | ||||||||
Section 906 CEO Certification | ||||||||
Section 906 CFO Certification |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Dearborn Bancorp, Inc.
Dearborn, Michigan
Dearborn Bancorp, Inc.
Dearborn, Michigan
We have reviewed the consolidated balance sheets of Dearborn Bancorp, Inc. (“the Corporation”) as of September 30, 2007 and 2006 and the related consolidated statements of income and comprehensive income for the three and nine month periods ended September 30, 2007 and 2006 and the related consolidated statements of cash flows for the nine month periods ended September 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
November 9, 2007
November 9, 2007
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DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars, in thousands) | 09/30/07 | 12/31/06 | 09/30/06 | |||||||||
ASSETS | ||||||||||||
Cash and cash equivalents | ||||||||||||
Cash and due from banks | $ | 14,929 | $ | 5,824 | $ | 8,975 | ||||||
Federal funds sold | 7,031 | 64,198 | 9,093 | |||||||||
Interest bearing deposits with banks | 100 | 8 | 52 | |||||||||
Total cash and cash equivalents | 22,060 | 70,030 | 18,120 | |||||||||
Mortgage loans held for sale | 384 | 1,823 | 1,096 | |||||||||
Securities, available for sale | 10,640 | 5,878 | 5,837 | |||||||||
Federal Home Loan Bank stock | 1,927 | 1,288 | 1,290 | |||||||||
Loans | ||||||||||||
Loans | 945,622 | 756,420 | 741,030 | |||||||||
Allowance for loan losses | (10,309 | ) | (7,775 | ) | (7,615 | ) | ||||||
Net loans | 935,313 | 748,645 | 733,415 | |||||||||
Premises and equipment, net | 23,043 | 14,293 | 14,173 | |||||||||
Real estate owned | 3,338 | 52 | 52 | |||||||||
Goodwill | 34,028 | 5,473 | 5,473 | |||||||||
Other intangible assets | 11,551 | 2,041 | 2,103 | |||||||||
Accrued interest receivable | 4,258 | 3,337 | 2,868 | |||||||||
Other assets | 5,416 | 3,071 | 3,372 | |||||||||
Total assets | $ | 1,051,958 | $ | 855,931 | $ | 787,799 | ||||||
LIABILITIES | ||||||||||||
Deposits | ||||||||||||
Non-interest bearing deposits | $ | 92,770 | $ | 53,065 | $ | 54,292 | ||||||
Interest bearing deposits | 768,764 | 580,151 | 596,819 | |||||||||
Total deposits | 861,534 | 633,216 | 651,111 | |||||||||
Other liabilities | ||||||||||||
Federal funds purchased | — | 37,300 | 10,200 | |||||||||
Securities sold under agreements to repurchase | 491 | 619 | 631 | |||||||||
Federal Home Loan Bank advances | 36,429 | 25,561 | 25,561 | |||||||||
Other liabilities | 619 | 516 | 421 | |||||||||
Accrued interest payable | 3,361 | 3,734 | 2,508 | |||||||||
Subordinated debentures | 10,000 | 10,000 | 10,000 | |||||||||
Total liabilities | 912,434 | 710,946 | 700,432 | |||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||
Common stock - 20,000,000 shares authorized, 8,471,913 shares at 09/30/07, 8,975,085 shares at 12/31/06; and 5,617,565 shares at 09/30/06 | 137,837 | 144,907 | 85,353 | |||||||||
Retained earnings | 1,675 | 84 | 2,025 | |||||||||
Accumulated other comprehensive income (loss) | 12 | (6 | ) | (11 | ) | |||||||
Total stockholders’ equity | 139,524 | 144,985 | 87,367 | |||||||||
Total liabilities and stockholders’ equity | $ | 1,051,958 | $ | 855,931 | $ | 787,799 | ||||||
The accompanying notes are an integral part of these consolidated statements.
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DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
(In thousands, except share and per share data) | 09/30/07 | 09/30/06 | 09/30/07 | 09/30/06 | ||||||||||||
Interest income | ||||||||||||||||
Interest on loans, including fees | $ | 17,565 | $ | 13,505 | $ | 51,949 | $ | 38,129 | ||||||||
Interest on securities, available for sale | 160 | 204 | 501 | 519 | ||||||||||||
Interest on federal funds | 84 | 155 | 361 | 376 | ||||||||||||
Interest on deposits with banks | 42 | 6 | 84 | 152 | ||||||||||||
Total interest income | 17,851 | 13,870 | 52,895 | 39,176 | ||||||||||||
�� | ||||||||||||||||
Interest expense | ||||||||||||||||
Interest on deposits | 8,663 | 6,332 | 24,687 | 16,783 | ||||||||||||
Interest on other borrowings | 497 | 467 | 1,808 | 1,100 | ||||||||||||
Interest on subordinated debentures | 190 | 225 | 655 | 635 | ||||||||||||
Total interest expense | 9,350 | 7,024 | 27,150 | 18,518 | ||||||||||||
Net interest income | 8,501 | 6,846 | 25,745 | 20,658 | ||||||||||||
Provision for loan losses | 4,060 | 470 | 4,966 | 782 | ||||||||||||
Net interest income after provision for loan losses | 4,441 | 6,376 | 20,779 | 19,876 | ||||||||||||
Non-interest income | ||||||||||||||||
Service charges on deposit accounts | 290 | 184 | 939 | 507 | ||||||||||||
Fees for other services to customers | 29 | 12 | 98 | 38 | ||||||||||||
Gain on the sale of loans | 34 | (8 | ) | 135 | 102 | |||||||||||
Write-down of real estate | (496 | ) | — | (596 | ) | — | ||||||||||
Loss on the sale of real estate | — | — | — | (103 | ) | |||||||||||
Gain on the sale of securities | — | 9 | — | 9 | ||||||||||||
Other income | 39 | 13 | 122 | 32 | ||||||||||||
Total non-interest income | (104 | ) | 210 | 698 | 585 | |||||||||||
Non-interest expenses | ||||||||||||||||
Salaries and employee benefits | 3,137 | 2,637 | 9,791 | 7,514 | ||||||||||||
Occupancy and equipment expense | 903 | 602 | 2,748 | 1,827 | ||||||||||||
Amortization of intangible assets | 240 | 63 | 912 | 188 | ||||||||||||
Advertising and marketing | 119 | 138 | 339 | 339 | ||||||||||||
Stationery and supplies | 124 | 124 | 480 | 285 | ||||||||||||
Professional services | 301 | 220 | 787 | 578 | ||||||||||||
Data processing | 114 | 124 | 442 | 380 | ||||||||||||
Other operating expenses | 553 | 306 | 1,558 | 914 | ||||||||||||
Total non-interest expenses | 5,491 | 4,214 | 17,057 | 12,025 | ||||||||||||
Income (loss) before income tax provision | (1,154 | ) | 2,372 | 4,420 | 8,436 | |||||||||||
Income tax provision (benefit) | (299 | ) | 807 | 1,652 | 2,869 | |||||||||||
Net income (loss) | $ | (855 | ) | $ | 1,565 | $ | 2,768 | $ | 5,567 | |||||||
Per share data: | ||||||||||||||||
Net income (loss) — basic | $ | (0.10 | ) | $ | 0.26 | $ | 0.32 | $ | 0.93 | |||||||
Net income (loss) — diluted | $ | (0.10 | ) | $ | 0.25 | $ | 0.31 | $ | 0.89 | |||||||
Weighted average number of shares outstanding — basic | 8,510,207 | 5,927,333 | 8,692,562 | 5,966,112 | ||||||||||||
Weighted average number of shares outstanding — diluted | 8,510,207 | 6,238,365 | 8,935,941 | 6,278,024 |
The accompanying notes are an integral part of these consolidated statements.
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DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
(In thousands) | 09/30/07 | 09/30/06 | 09/30/07 | 09/30/06 | ||||||||||||
Net income (loss) | ($855 | ) | $ | 1,565 | $ | 2,768 | $ | 5,567 | ||||||||
Other comprehensive income, net of tax | ||||||||||||||||
Unrealized gains on securities available for sale | ||||||||||||||||
Unrealized holding gains arising during during period | 15 | 4 | 25 | 15 | ||||||||||||
Deferred tax effects | (5 | ) | (1 | ) | (7 | ) | (5 | ) | ||||||||
Other comprehensive income | 10 | 3 | 18 | 10 | ||||||||||||
Comprehensive income (loss) | ($845 | ) | $ | 1,568 | $ | 2,786 | $ | 5,577 | ||||||||
The accompanying notes are an integral part of these consolidated statements.
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DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended | ||||||||
(In thousands) | 9/30/2007 | 9/30/2006 | ||||||
Cash flows from operating activities | ||||||||
Interest and fees received | $ | 51,974 | $ | 38,897 | ||||
Interest paid | (27,523 | ) | (17,693 | ) | ||||
Proceeds from sale of mortgages held for sale | 16,365 | 16,810 | ||||||
Origination of mortgages held for sale | (14,791 | ) | (16,611 | ) | ||||
Taxes paid | (3,322 | ) | (3,490 | ) | ||||
Loss on sale of real estate owned | — | (103 | ) | |||||
Cash paid to suppliers and employees | (18,803 | ) | (10,993 | ) | ||||
Net cash provided by operating activities | 3,900 | 6,817 | ||||||
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 | 6,657 | 30,669 | ||||||
Purchases of securities available for sale | (29,198 | ) | (19,039 | ) | ||||
(Purchase) sale of Federal Home Loan Bank stock | (639 | ) | 3 | |||||
Increase in loans, net of payments received | (13,785 | ) | (83,968 | ) | ||||
Purchases of property and equipment | (5,108 | ) | (1,087 | ) | ||||
Net cash paid in Fidelity acquisition | (32,122 | ) | — | |||||
Net cash used in investing activities | (56,188 | ) | (73,422 | ) | ||||
Cash flows from financing activities | ||||||||
Net decrease in non-interest bearing deposits | (6,303 | ) | (5,360 | ) | ||||
Net increase in interest bearing deposits | 47,074 | 74,033 | ||||||
Decrease in other borrowings | (128 | ) | (27 | ) | ||||
Net increase (decrease) in federal funds purchased | (37,300 | ) | 10,200 | |||||
Proceeds from Federal Home Loan Bank advances | 9,101 | (984 | ) | |||||
Purchase of common stock | (8,411 | ) | (2,824 | ) | ||||
Exercise of stock options | 62 | 174 | ||||||
Tax benefit of stock options exercised | 223 | 58 | ||||||
Net cash provided by financing activities | 4,318 | 75,270 | ||||||
Increase (decrease) in cash and cash equivalents | (47,970 | ) | 8,665 | |||||
Cash and cash equivalents at the beginning of the period | 70,030 | 9,455 | ||||||
Cash and cash equivalents at the end of the period | $ | 22,060 | $ | 18,120 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Nine Months Ended | ||||||||
(In thousands) | 9/30/2007 | 9/30/2006 | ||||||
Reconciliation of net income to net cash provided by operating activities | ||||||||
Net income | $ | 2,768 | $ | 5,567 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Provision for loan losses | 4,966 | 782 | ||||||
Depreciation and amortization expense | 1,070 | 706 | ||||||
Restricted stock award expense | (84 | ) | 101 | |||||
Stock option expense | (36 | ) | 45 | |||||
Accretion of discount on securities | (202 | ) | (272 | ) | ||||
Amortization of premium on securities | 1 | 8 | ||||||
Writedown of other real estate owned | 596 | — | ||||||
Amortization of intangible assets | 911 | 188 | ||||||
(Increase) decrease in mortgages held for sale | 1,439 | (55 | ) | |||||
(Increase) decrease in interest receivable | 323 | (282 | ) | |||||
(Increase) decrease in other assets | (5,286 | ) | 825 | |||||
Increase (decrease) in interest payable | (710 | ) | (257 | ) | ||||
Decrease in other liabilities | (1,856 | ) | (539 | ) | ||||
Net cash provided by operating activities | $ | 3,900 | $ | 6,817 | ||||
Supplemental noncash disclosures: | ||||||||
Transfers from loans to real estate owned | $ | 3,911 | $ | 91 | ||||
Noncash investing activities: | ||||||||
Fidelity Bank acquisition: | ||||||||
Loans acquired | 178,052 | — | ||||||
Premises and equipment acquired | 9,214 | — | ||||||
Acquisition intangibles recorded | 38,977 | — | ||||||
Other assets acquired | 2,194 | — | ||||||
Deposits assumed | (187,635 | ) | — | |||||
Borrowings assumed | (1,767 | ) | — | |||||
Other liabilities assumed | (2,299 | ) | — | |||||
Net assets acquired | $ | 36,736 | — | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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DEARBORN BANCORP, INC.
FORM 10-Q (continued)
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 E, the Corporation acquired Fidelity Financial Corporation of Michigan and its subsidiary, Fidelity Bank on January 4, 2007. As a result of the acquisition, Fidelity Bank was merged into the Corporation’s subsidiary. On April 30, 2007, the 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 September 30, 2007 and 2006, and December 31, 2006 and for the three and nine month periods ended September 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 nine month periods ended September 30, 2007 are not necessarily indicative of results of operations for the entire year. | ||
The consolidated financial statements as of September 30, 2007 and 2006, and for the three and nine months ended September 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 impairment of securities. |
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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 33,565 shares of common stock were not considered in computing diluted earnings per common share for the nine months ended September 30, 2007 and 2006, respectively, because they were antidilutive. Stock options for 515,401 and 33,565 shares of common stock were not considered in computing diluted earnings per common share for the three months ended September 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 | ||
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 2004. |
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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. | ||
In September 2006, FASB issued Statement No. 157, “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions abour risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. The Corporation has not completed its evaluation of the impact of the adoption of this standard. |
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B. | Securities Available For Sale | |
The amortized cost and fair value of securities available for sale are as follows (in thousands): |
September 30, 2007 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
US Treasury securities | $ | 9,534 | $ | 6 | ($2 | ) | $ | 9,538 | ||||||||
Municipal bonds | 759 | 10 | �� | — | 769 | |||||||||||
Mortgage backed securities | 330 | 3 | — | 333 | ||||||||||||
Totals | $ | 10,623 | $ | 19 | ($2 | ) | $ | 10,640 | ||||||||
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 | ||||||||
The amortized cost and fair value of securities available for sale at September 30, 2007 by contractual maturity are shown below (in thousands): |
Amortized | Fair | |||||||
Cost | Value | |||||||
Due in less than three months | $ | 5,740 | $ | 5,743 | ||||
Due in three months through one year | 3,794 | 3,795 | ||||||
Due in one year through five years | 759 | 769 | ||||||
Mortgage backed securities | 330 | 333 | ||||||
Totals | $ | 10,623 | $ | 10,640 | ||||
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B. | Securities Available For Sale (con’t) | |
The entire portfolio has a net unrealized gain of $17,000 at September 30, 2007. Securities with unrealized losses at September 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): |
Fair Value | Unrealized Loss | |||||||
Investment category | ||||||||
US treasury securities | $ | 4,315 | $ | 2 | ||||
Total temporarily impaired | $ | 4,315 | $ | 2 | ||||
Fair Value | Unrealized Loss | |||||||
Length of time in a continuous loss position | ||||||||
Less than one year | $ | 2,315 | $ | 1 | ||||
One to three years | 2,000 | 1 | ||||||
Total temporarily impaired | $ | 4,315 | $ | 2 | ||||
Unrealized losses on securities, available for sale at September 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. |
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C. | Allowance for Loan Losses | |
The following is a summary of non-performing assets at September 30, 2007 and December 31, 2006 (in thousands): |
09/30/07 | 12/31/06 | |||||||
Over 90 days past due and still accruing | $ | 2,673 | $ | 2,101 | ||||
Non-accrual loans | 17,297 | 5,560 | ||||||
Total non-performing loans | 19,970 | 7,661 | ||||||
Real estate owned | 3,338 | 52 | ||||||
Other repossessed assets | 0 | 2 | ||||||
Other non-performing assets | 3,338 | 54 | ||||||
Total non-performing assets | $ | 23,308 | $ | 7,715 | ||||
Activity in the allowance for loan losses for the three and nine month periods ended September 30, 2007 and 2006 are as follows (in thousands): |
Three Months | Three Months | |||||||
Ended | Ended | |||||||
09/30/07 | 09/30/06 | |||||||
Balance, beginning of period | $ | 9,949 | $ | 7,154 | ||||
Charge-offs | 3,887 | 32 | ||||||
Recoveries | 187 | 23 | ||||||
Net charge-offs | 3,700 | 9 | ||||||
Provision for loan losses | 4,060 | 470 | ||||||
Balance, end of period | $ | 10,309 | $ | 7,615 | ||||
Nine Months | Nine Months | |||||||
Ended | Ended | |||||||
09/30/07 | 09/30/06 | |||||||
Balance, beginning of period | $ | 7,775 | $ | 6,808 | ||||
Allowance on loans from acquisition | 1,704 | — | ||||||
Charge-offs | 4,521 | 114 | ||||||
Recoveries | 385 | 139 | ||||||
Net charge-offs (recoveries) | 4,136 | (25 | ) | |||||
Provision for loan losses | 4,966 | 782 | ||||||
Balance, end of period | $ | 10,309 | $ | 7,615 | ||||
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D. | Incentive Stock Plans | |
Incentive stock awards have been granted to officers and employees under two Incentive Stock Plans. The first plan is the 1994 Stock Option Plan. Options to buy common stock have been granted to officers and employees under the 1994 Stock Option Plan, which provides for issue of up to 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 | — | (14,741 | ) | 4.41 | ||||||||
Outstanding at September 30, 2007 | — | 453,682 | $ | 8.29 |
For the options outstanding at September 30, 2007, the range of exercise prices was $4.18 to $14.65 per share with a weighted-average remaining contractual term of 3.7 years. At September 30, 2007, 453,682 options were exercisable at weighted average exercise price of $8.29 per share. The intrinsic value of options exercised during the year was approximately $206,000 and the intrinsic value of options outstanding at September 30, 2007 was approximately $2,102,000. | ||
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 performance-based 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 actual cost of these awards could range from zero to 150% of the currently recorded compensation cost, depending on the Corporation’s actual performance. The expected compensation cost of the performance-based awards was being calculated assuming the Corporation’s attainment of “target” performance goals over the vesting period of the awards. In the third quarter of 2007, the performance awards were modified because the original performance criteria and vesting requirements were no longer considered to be reasonable or attainable and the Corporation wanted to maintain more practical incentives for the award recipients. The cost recorded by the Corporation was adjusted during the third quarter of 2007 by reversing the expense recorded for the original awards and recognizing expense for the modified awards based on the vesting to date and the modified terms and performance targets. |
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D. | Incentive Stock Plans (con’t) | |
Accounting for the modified performance-based awards is summarized as follows: | ||
Stock Options Granted — The incentive stock options were granted with exercise prices equal to market prices on the day of grant. At September 30, 2007, there were 35,251 stock options granted with a weighted average exercise price, as modified, of $13.06. These options are eligible to vest fully three years from grant date. | ||
The Corporation reversed expense related to stock options of $120,000 and recognized compensation expense of $40,000 in the third quarter of 2007 due to the award modifications. The expense that was reversed is comprised of $76,000 from the grant date through December 31, 2006 and $44,000 for the nine months ended September 30, 2007. The expense for the modified awards recognized related to stock options is comprised of $20,000 from the grant date through December 31, 2006 and $20,000 for the nine months ended September 30, 2007. | ||
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 September 30, 2007, there were 23,956 shares of restricted stock outstanding. | ||
The Corporation reversed expense related to restricted stock of $270,000 and recognized expense of $87,000 in the third quarter of 2007 due to the award modifications. The expense that was reversed is comprised of $172,000 from the grant date through December 31, 2006 and $98,000 for the nine months ended September 30, 2007. The expense for the modified awards recognized related to restricted stock is comprised of $45,000 from the grant date through December 31, 2006 and $42,000 for the nine months ended September 30, 2007. |
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E. | 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 $10,422,000. Goodwill from the acquisition of Fidelity aggregates to $28,555,000. | ||
The table displayed on the following page presents pro forma information for the Corporation including the acquisition of Fidelity for the three and nine months ended September 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. |
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E. | Acquisition (con’t) |
Three Months Ended | Nine Months Ended | |||||||
(In thousands, except share and per share data | 09/30/06 | 09/30/06 | ||||||
Interest income | $ | 17,925 | $ | 50,925 | ||||
Interest expense | 8,390 | 22,116 | ||||||
Net interest income | 9,535 | 28,809 | ||||||
Provision for loan losses | 560 | 1,032 | ||||||
Net interest income after provision for loan losses | 8,975 | 27,777 | ||||||
Non-interest income | 563 | 1,687 | ||||||
Non-interest expense | 6,193 | 18,456 | ||||||
Income before income tax provision | 3,345 | 11,008 | ||||||
Income tax provision | 1,139 | 3,744 | ||||||
Net income | $ | 2,206 | $ | 7,264 | ||||
Per share data: | ||||||||
Net income — basic | $ | 0.25 | $ | 0.80 | ||||
Net income — diluted | $ | 0.24 | $ | 0.78 | ||||
Weighted average shares outstanding — basic | 8,991,496 | 9,030,275 | ||||||
Weighted average shares outstanding — diluted | 9,302,528 | 9,342,187 |
F. | Stockholders’ Equity | |
Stockholders’ equity at September 30, 2007 was $139,524,000 compared to $144,985,000 as of December 31, 2006. Activity in Stockholders’ equity during 2007 is listed below (in thousands): |
Amount | ||||
Balance, beginning of period | $ | 144,985 | ||
Purchase of common stock (527,300 shares) | (8,411 | ) | ||
Stock awards and options earned | (121 | ) | ||
Exercise of stock options (14,741 shares) | 62 | |||
Tax effect of exersised stock options | 223 | |||
Net income | 2,768 | |||
Other comprehensive income | 18 | |||
Balance, end of period | $ | 139,524 | ||
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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.
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.
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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 the Bank opened an office in Oakland County, Michigan in 2003.
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 closed a full service branch office in Southfield, Michigan on August 17, 2007. The Bank currently operates nineteen 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:
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.
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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 asset quality in this environment by enforcing strong underwriting guidelines and utilizing a diligent loan review process. Despite these measures, the Bank has recorded charge-offs of certain loans, as the value of the underlying collateral of certain non-performing loans has continued to decline. Additionally, the carrying values of real estate owned properties have been adjusted appropriately, as the market value of the real estate has declined.
The Corporation recorded a net loss of ($855,000) and net income of $2,768,000 during the three months and nine months ended September 30, 2007. The loss was primarily due to the provision for loan losses and the write-down of real estate owned. The provision for loan losses is determined by the internal analysis of the allowance for loan losses and the large increase during the quarter was the result of a higher level of non-performing loans and net charge-offs. Net charge-offs amounted to $3,700,000 and $4,136,000 during the three and nine month periods ended September 30, 2007, respectively. The Corporation also wrote down the value of two real estate properties in the amount of $496,000 and $596,000 during the three and nine month periods ended September 30, 2007, respectively.
Income during the period was also impacted 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 rate spreads than in other reporting periods.
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The date opened, branch location and branch type of each branch is listed on the following page:
Date Opened | Location | Type of office | ||
February 1994 | 22290 Michigan Avenue | Full service retail branch with ATM | ||
Dearborn, Michigan 48123 | Regional lending certer | |||
December 1995 | 24935 West Warren Avenue | Full service retail branch | ||
Dearborn Heights, Michigan 48127 | ||||
August 1997 | 44623 Five Mile Road | Full service retail branch with ATM | ||
Plymouth, Michigan 48170 | ||||
May 2001 | 1325 North Canton Center Road | Full service retail branch with ATM | ||
Canton, Michigan 48187 | ||||
December 2001 | 45000 River Ridge Drive | Regional lending center | ||
Clinton Township, Michigan 48038 | ||||
November 2002 | 19100 Hall Road | Full service retail branch with ATM | ||
Clinton Township, Michigan 48038 | ||||
February 2003 | 12820 Fort Street | Full service retail branch with ATM | ||
Southgate, Michigan 48195 | ||||
May 2003 | 3201 University Drive, Suite 180 | Full service retail branch | ||
Auburn Hills, Michigan 48326 | ||||
October 2004 | 450 East Michigan Avenue | Full service retail branch with ATM | ||
Saline, MI 48176 | ||||
October 2004 | 250 West Eisenhower Parkway | Full service retail branch with ATM | ||
Ann Arbor, MI 48103 | Regional lending certer | |||
October 2004 | 2180 West Stadium Blvd. | Full service retail branch with ATM | ||
Ann Arbor, MI 48103 | ||||
December 2004 | 1360 Porter Street | Loan production office | ||
Dearborn, MI 48123 | Regional lending center | |||
January 2007 | 1040 E. Maple | Full service retail branch with ATM | ||
Birmingham, MI 48009 | Regional lending certer | |||
January 2007 | 3681 W. Maple | Full service retail branch with ATM | ||
Birmingham, MI 48301 | ||||
January 2007 | 30700 Telegraph | Full service retail branch with ATM | ||
Bingham Farms, Mi 48025 | ||||
January 2007 | 20000 Twelve Mile Road | Full service retail branch with ATM | ||
Southfield, Mi 48076 | ||||
January 2007 | 26555 Evergreen | Full service retail branch with ATM | ||
Southfield, Mi 48076 | ||||
January 2007 | 200 Galleria Officenter | Full service retail branch with ATM | ||
Southfield, Mi 48034 | ||||
April 2007 | 7755 23 Mile Road | Full service retail branch with ATM | ||
Shelby Township, MI 48316 |
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Results of Operations
The Corporation reported a net loss of ($855,000) and net income of $2,768,000 for the three and nine month periods ended September 30, 2007, compared to net income of $1,565,000 and $5,567,000 for the same periods in 2006. The net loss during the three months ended September 30, 2007 and decreased net income during the nine months ended September 30, 2007 were primarily due to higher provision for loan losses, the write-downs of foreclosed real estate properties and increased non-interest expenses during the period. The increase in provision for loan losses and the write-down of two real estate properties during the period were primarily due to the collapse of the residential real estate market in Southeastern Michigan, which has impacted our portfolio of land development and commercial construction loans and is the primary cause of the increase in non-performing loans. These loans were well-collateralized loans with well-established real estate developers and home builders. However, the demand for new residential construction in Southeastern Michigan has diminished dramatically. The increase in various non-interest expenses 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 nine month periods ended September 30, 2007 was $8,501,000 and $25,745,000, compared to $6,846,000 and $20,658,000 for the same periods in 2006, an increase of $1,655,000 or 24% for the three month period and $5,087,000 of 25% for the nine 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 2.72% and 2.80% for the three month period and nine month period ended September 30, 2007, compared to 2.94% and 3.17% for the same periods in 2006. The Corporation’s net interest margin was 3.48% and 3.56% for the three and nine month periods ended September 30, 2007, compared to 3.65% and 3.84% 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.
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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 are included in the loan category.
Three months ended September 30, | Three months ended September 30, | |||||||||||||||||||||||
2007 | 2006 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
(In thousands) | Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest-bearing deposits with banks | $ | 3,553 | $ | 42 | 4.69 | % | $ | 491 | $ | 6 | 4.85 | % | ||||||||||||
Federal funds sold | 6,983 | 84 | 4.77 | % | 11,436 | 155 | 5.38 | % | ||||||||||||||||
Securities available for sale | 12,672 | 160 | 5.01 | % | 17,307 | 204 | 4.68 | % | ||||||||||||||||
Loans (1) | 946,732 | 17,565 | 7.36 | % | 715,783 | 13,505 | 7.48 | % | ||||||||||||||||
Total earning assets | 969,940 | 17,851 | 7.30 | % | 745,017 | 13,870 | 7.38 | % | ||||||||||||||||
Other assets | 82,245 | 29,712 | ||||||||||||||||||||||
Total assets | $ | 1,052,185 | $ | 774,729 | ||||||||||||||||||||
Liabilities and stockholders’ equity | ||||||||||||||||||||||||
Interest bearing deposits | $ | 759,712 | $ | 8,663 | 4.52 | % | $ | 578,425 | $ | 6,332 | 4.34 | % | ||||||||||||
Other borrowings | 50,028 | 687 | 5.45 | % | 48,621 | 692 | 5.65 | % | ||||||||||||||||
Total interest bearing liabilities | 809,740 | 9,350 | 4.58 | % | 627,046 | 7,024 | 4.44 | % | ||||||||||||||||
Non-interest bearing deposits | 95,247 | 57,649 | ||||||||||||||||||||||
Other liabilities | 4,094 | 2,486 | ||||||||||||||||||||||
Stockholders’ equity | 143,104 | 87,548 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,052,185 | $ | 774,729 | ||||||||||||||||||||
Net interest income | $ | 8,501 | $ | 6,846 | ||||||||||||||||||||
Net interest rate spread | 2.72 | % | 2.94 | % | ||||||||||||||||||||
Net interest margin on earning assets | 3.48 | % | 3.65 | % | ||||||||||||||||||||
(1) | Non-accrual loans included |
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Nine months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
2007 | 2006 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
(In thousands) | Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest-bearing deposits with banks | $ | 2,479 | $ | 84 | 4.53 | % | $ | 4,427 | $ | 152 | 4.59 | % | ||||||||||||
Federal funds sold | 8,546 | 361 | 5.65 | % | 9,929 | 376 | 5.06 | % | ||||||||||||||||
Securities available for sale | 13,327 | 501 | 5.03 | % | 15,849 | 519 | 4.38 | % | ||||||||||||||||
Loans (1) | 942,000 | 51,949 | 7.37 | % | 688,178 | 38,129 | 7.41 | % | ||||||||||||||||
Total earning assets | 966,352 | 52,895 | 7.32 | % | 718,383 | 39,176 | 7.29 | % | ||||||||||||||||
Other assets | 81,286 | 30,508 | ||||||||||||||||||||||
Total assets | $ | 1,047,638 | $ | 748,891 | ||||||||||||||||||||
Liabilities and stockholders’ equity | ||||||||||||||||||||||||
Interest bearing deposits | $ | 744,886 | $ | 24,687 | 4.43 | % | $ | 559,676 | $ | 16,783 | 4.01 | % | ||||||||||||
Other borrowings | 57,543 | 2,463 | 5.72 | % | 41,908 | 1,735 | 5.54 | % | ||||||||||||||||
Total interest bearing liabilities | 802,429 | 27,150 | 4.52 | % | 601,584 | 18,518 | 4.12 | % | ||||||||||||||||
Non-interest bearing deposits | 95,799 | 58,152 | ||||||||||||||||||||||
Other liabilities | 4,990 | 2,128 | ||||||||||||||||||||||
Stockholders’ equity | 144,420 | 87,027 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,047,638 | $ | 748,891 | ||||||||||||||||||||
Net interest income | $ | 25,745 | $ | 20,658 | ||||||||||||||||||||
Net interest rate spread | 2.80 | % | 3.17 | % | ||||||||||||||||||||
Net interest margin on earning assets | 3.56 | % | 3.84 | % | ||||||||||||||||||||
(1) | Non-accrual loans included |
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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 September 30, | Nine Months Ended September 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 | $ | 36 | — | $ | 36 | ($67 | ) | ($1 | ) | ($68 | ) | |||||||||||||
Federal funds sold | (54 | ) | (17 | ) | (71 | ) | (44 | ) | 29 | (15 | ) | |||||||||||||
Securities available for sale | (58 | ) | 14 | (44 | ) | (72 | ) | 54 | (18 | ) | ||||||||||||||
Loans | 4,283 | (223 | ) | 4,060 | 13,938 | (118 | ) | 13,820 | ||||||||||||||||
Total earning assets | $ | 4,207 | $ | (226 | ) | $ | 3,981 | $ | 13,755 | $ | (36 | ) | $ | 13,719 | ||||||||||
Liabilities | ||||||||||||||||||||||||
Interest bearing deposits | $ | 2,069 | 262 | $ | 2,331 | $ | 6,724 | $ | 1,180 | $ | 7,904 | |||||||||||||
Other borrowings | 19 | (24 | ) | (5 | ) | 689 | 39 | 728 | ||||||||||||||||
Total interest bearing liabilities | $ | 2,088 | $ | 238 | $ | 2,326 | $ | 7,413 | $ | 1,219 | $ | 8,632 | ||||||||||||
Net interest income | $ | 1,655 | $ | 5,087 | ||||||||||||||||||||
Net interest rate spread | (0.22 | %) | (0.38 | %) | ||||||||||||||||||||
Net interest margin on earning assets | (0.17 | %) | (0.28 | %) | ||||||||||||||||||||
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Provision for Loan Losses
2007 Compared to 2006.The provision for loan losses was $4,060,000 and $4,966,000 for the three and nine month periods ended September 30, 2007, compared to $470,000 and $782,000 for the same periods in 2006, an increase of $3,590,000 or 764% for the three month period and $4,184,000 or 535% for the nine month period. The provision for loan losses 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 due primarily to the increase in non-accrual loans and net charge-offs during the period as a result of the collapse of the residential real estate market in Southeastern Michigan. These economic conditions have impacted our portfolio of land development and commercial construction loans and is the primary cause of the increase in non-performing loans. At the time of origination, these loans were well-collateralized loans with well-established real estate developers and home builders. However, the underlying value of our collateral related to these types of loans has declined as the demand for new residential construction in Southeastern Michigan has diminished dramatically.
Non-interest Income
2007 Compared to 2006.Non-interest income was ($104,000) and $698,000 for the three and nine month periods ended September 30, 2007, compared to $210,000 and $585,000 for the same periods in 2006, a decrease of $314,000 or 150% for the three month period and an increase of $113,000 or 19% for the nine month period. The decrease during the three month period was primarily due to the write-down of two real estate properties and partially offset by an increase in service charges on deposit accounts. The increase during the nine month period was primarily due to increases in service charges on deposit accounts and fees for other services to customers and substantially offset by the write-down of two real estate properties. The increases in service charges on deposit accounts and fees for other services to customers were 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 8.38% to 10.77% in 2007 was primarily due to the acquisition of Fidelity.
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Non-interest Expense
2007 Compared to 2006.Non-interest expense was $5,491,000 and $17,057,000 for the three and nine month periods ended September 30, 2007, compared to $4,214,000 and $12,025,000 for the same periods in 2006, an increase of $1,277,000 or 30% for the three month period and $5,032,000 or 42% for the nine month period. The largest component of non-interest expense was salaries and employee benefits which amounted to $3,137,000 and $9,791,000 for the three and nine month periods ended September 30, 2007, compared to $2,637,000 and $7,514,000 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 September 30, 2007, the number of full time equivalent employees was 208 compared to 156 as of September 30, 2006. This increase is primarily 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 $903,000 and $2,748,000 for the three and nine month periods ended September 30, 2007, compared to $602,000 and $1,827,000 for the same periods in 2006, an increase of $301,000 or 50% for the three month period and $921,000 or 51% for the nine month period. This increase is primarily due to the acquisition of Fidelity and its eight buildings and the opening of a branch office in Shelby Township, Michigan on April 30, 2007.
Income Taxes
2007 Compared to 2006.The Corporation recognized an income tax benefit of $299,000 and income tax expense of $1,652,000 for the three and nine month periods ended September 30, 2007, compared to $807,000 and $2,869,000 for the same periods in 2006, a decrease of $1,106,000 or 70% for the three month period and $2,062,000 or 72% for the nine month period. The decrease in both periods was primarily a result of the decrease in pre-tax income and the expiration of a loss carryforward.
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Comparison of Financial Condition at September 30, 2007 and December 31, 2006
Assets.Total assets at September 30, 2007 were $1,051,958,000 compared to $855,931,000 at December 31, 2006, an increase of $196,027,000 or 23%. 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 September 30, 2007 were $7,031,000 compared to $64,198,000 at December 31, 2006, a decrease of $57,167,000 or 89%. The decrease in federal funds sold is the result of funding the acquisition of Fidelity during the period.
Interest bearing deposits with banks.Total interest bearing deposits with banks at September 30, 2007 were $100,000 compared to $8,000 at December 31, 2006, an increase of $92,000. 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 September 30, 2007 were $384,000 compared to $1,823,000 at December 31, 2006, a decrease of $1,439,000 or 79%. 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 September 30, 2007 were $10,640,000 compared to $5,878,000 at December 31, 2006, an increase of $4,762,000 or 81%. 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 $17,000 at September 30, 2007. The unrealized gain is reflected by an adjustment to stockholders’ equity, net of deferred tax effects.
Federal Home Loan Bank Stock.Federal Home Loan Bank stock was carried at $1,927,000 at September 30, 2007 compared to $1,288,000 at December 31, 2006, an increase of $639,000 or 50%. The increase was due to the acquisition of Fidelity.
Loans.Total loans at September 30, 2007 were $945,622,000 compared to $756,420,000 at December 31, 2006, an increase of $189,202,000 or 25%. The increase was primarily due to the acquisition of Fidelity and modest growth of the Bank’s loan portfolio during the past nine months. Major categories of loans included in the loan portfolio are as follows (in thousands):
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09/30/07 | 12/31/06 | 09/30/06 | ||||||||||
Consumer loans | $ | 35,696 | $ | 32,282 | $ | 33,261 | ||||||
Commercial, financial, & other | 188,155 | 130,056 | 127,024 | |||||||||
Commercial construction — residential property | 47,435 | 55,696 | 56,589 | |||||||||
Commercial construction — non residential property | 43,689 | 41,360 | 44,346 | |||||||||
Land development loans — residential property | 24,643 | 22,380 | 21,248 | |||||||||
Land development loans — non residential property | 14,961 | 15,870 | 11,018 | |||||||||
Commercial real estate mortgages | 537,068 | 410,829 | 402,008 | |||||||||
Residential real estate mortgages | 53,975 | 47,947 | 45,536 | |||||||||
945,622 | 756,420 | 741,030 | ||||||||||
Allowance for loan losses | (10,309 | ) | (7,775 | ) | (7,615 | ) | ||||||
$ | 935,313 | $ | 748,645 | $ | 733,415 | |||||||
The following is a summary of non-performing assets (in thousands):
09/30/07 | 12/31/06 | 09/30/06 | ||||||||||
Over 90 days past due and still accruing | $ | 2,673 | $ | 2,101 | $ | 189 | ||||||
Non-accrual loans | 17,297 | 5,560 | 4,602 | |||||||||
Total non-performing loans | 19,970 | 7,661 | 4,791 | |||||||||
Real estate owned | 3,338 | 52 | 52 | |||||||||
Other repossessed assets | — | 2 | — | |||||||||
Other non-performing assets | 3,338 | 54 | 52 | |||||||||
Total non-performing assets | $ | 23,308 | $ | 7,715 | $ | 4,843 | ||||||
Non-accrual loans at September 30, 2007 were $17,297,000, 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 39 commercial and commercial construction loans for $15,182,000, which is partially offset by the transfer of two loans for $2,987,000 to real estate owned. There are 9 loans totaling $3,069,000 included in non-performing loans that were acquired in the acquisition of Fidelity.
The collapse of the residential real estate market in Southeastern Michigan has impacted our portfolio of land development and commercial construction loans and is the primary cause of the increase in non-performing loans. At the time of origination, these loans were well-collateralized loans with well-established real estate developers and home builders. However, the underlying value of our collateral related to these types of loans has declined as the demand for new residential construction in Southeastern Michigan has diminished dramatically and the impact on our loan portfolio is expected to continue. The distribution of non-accrual loans by loan type (dollars, in thousands) is as follows at September 30, 2007:
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Number of | ||||||||
Loans | Balance | |||||||
Consumer loans | 5 | $ | 465 | |||||
Commercial, financial, & other | 7 | 1,882 | ||||||
Commercial real estate construction — residential property | 11 | 4,180 | ||||||
Commercial real estate construction — non residential property | — | — | ||||||
Land development loans — residential property | 11 | 6,895 | ||||||
Land development loans — non residential property | — | — | ||||||
Commercial real estate mortgages | 12 | 3,684 | ||||||
Residential real estate mortgages | 2 | 191 | ||||||
Total non-accrual loans | 48 | $ | 17,297 | |||||
Allowance for Loan Losses.The allowance for loan losses was $10,309,000 at September 30, 2007 compared to $7,775,000 at December 31, 2006, an increase of $2,534,000 or 33%. The increase was primarily due to the acquisition of Fidelity and provision for loan losses made during the period. The large increase in provision for loan losses during the quarter was primarily the result of net charge-offs during the quarter. Net charge-offs amounted to $3,700,000 and $4,136,000 during the three and nine month periods ended September 30, 2007, respectively. These charge-offs were primarily related to loans financing the development and construction of residential property. The collapse of the value of the residential real estate market in Southeastern Michigan has negatively impacted the underlying collateral value of our portfolio of residential, land development and commercial construction loans. While these loans were well collateralized when they were made, the market value of the underlying collateral has declined dramatically. This downturn in the residential real estate market is expected to continue and management expects the decline in the market value of our collateral to continue. The allowance for loan losses was based upon management’s assessment of relevant factors, including specific borrower situations and estimated collateral values, 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):
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Nine Months | Nine Months | |||||||||||
Ended | Year Ended | Ended | ||||||||||
09/30/07 | 12/31/06 | 09/30/06 | ||||||||||
Balance, beginning of year | $ | 7,775 | $ | 6,808 | $ | 6,808 | ||||||
Allowance on loans from acquisition | 1,704 | — | — | |||||||||
Charge-offs: | ||||||||||||
Consumer loans | 190 | 24 | — | |||||||||
Commercial, financial & other | 829 | 139 | 40 | |||||||||
Commercial real estate construction — residential property | 1,344 | — | — | |||||||||
Commercial real estate construction — non residential property | 14 | — | — | |||||||||
Land development loans — residential property | 1,378 | — | — | |||||||||
Land development loans – non residential property Commercial real estate mortgages | 446 | 36 | 36 | |||||||||
Residential real estate mortgages | 320 | 38 | 38 | |||||||||
Recoveries: | ||||||||||||
Consumer loans | 23 | 17 | 16 | |||||||||
Commercial, financial & other | 223 | 218 | 102 | |||||||||
Commercial real estate construction — residential property | — | — | — | |||||||||
Commercial real estate construction — non residential property | — | — | — | |||||||||
Land development loans — residential property | — | — | — | |||||||||
Land development loans – non residential property | — | — | — | |||||||||
Commercial real estate mortgages | 139 | 26 | 21 | |||||||||
Residential real estate mortgages | — | — | — | |||||||||
Net charge-offs (recoveries) | 4,136 | (24 | ) | (25 | ) | |||||||
Additions charged to operations | 4,966 | 943 | 782 | |||||||||
Balance, end of period | $ | 10,309 | $ | 7,775 | $ | 7,615 | ||||||
Allowance to total loans | 1.09 | % | 1.03 | % | 1.03 | % | ||||||
Allowance to nonperforming loans | 51.62 | % | 101.49 | % | 158.94 | % | ||||||
Net charge-offs to average loans | 0.44 | % | 0.00 | % | 0.00 | % | ||||||
Premises and Equipment.Premises and equipment at September 30, 2007 were $23,043,000 compared to $14,293,000 at December 31, 2006, an increase of $8,750,000 or 61%. 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 September 30, 2007 was $3,338,000 compared to $52,000 at December 31, 2006, an increase of $3,286,000. Real estate owned is carried at fair value and at September 30, 2007 is comprised of four residential properties, three commercial properties and a development with nineteen building lots. The fair value of real estate properties is analyzed on a regular basis and adjusted appropriately. The Corporation recognized write-downs to real estate properties of $496,000 and $596,000 during the three and nine month periods ended September 30, 2007, respectively. These write-downs were primarily due the declining value of developed lots and commercial construction as a result of the downturn in the residential real estate market in Southeastern Michigan.
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Goodwill and other intangible assets.Goodwill and other intangible assets were $45,579,000 at September 30, 2007 compared to $7,514,000 at December 31, 2006, an increase of $38,065,000 or 507%. 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 September 30, 2007 was as follows (in thousands):
Gross | ||||||||
Carrying | Accumulated | |||||||
Amount | Amortization | |||||||
Core deposit intangible from acquisition of: | ||||||||
Bank of Washtenaw | $ | 929 | $ | 374 | ||||
Fidelity Financial Corporation of Michigan | 6,864 | 562 | ||||||
Total core deposit intangible | $ | 7,793 | $ | 936 | ||||
Borrower relationship intangible from acquisition of: | ||||||||
Bank of Washtenaw | $ | 1,620 | $ | 327 | ||||
Fidelity Financial Corporation of Michigan | 3,558 | 157 | ||||||
Total borrower relationship intangible | $ | 5,178 | $ | 484 | ||||
Total intangible assets | $ | 12,971 | $ | 1,420 | ||||
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 September 30, 2007, the core deposit intangible and borrower relationship intangible amounted to $6,857,000 and $4,694,000, respectively, net of accumulated amortization.
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 $36,736,000. 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.
Accrued Interest Receivable.Accrued interest receivable at September 30, 2007 was $4,258,000 compared to $3,337,000 at December 31, 2006, an increase of $921,000 or 28%. 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 September 30, 2007 were $5,416,000 compared to $3,071,000 at December 31, 2006, an increase of $2,345,000 or 76%. The increase was primarily due to changes in deferred tax assets and prepaid tax assets, due in part to the decline in pre-tax income during the third quarter of 2007.
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Deposits.Total deposits at September 30, 2007 were $861,534,000 compared to $633,216,000 at December 31, 2006, an increase of $228,318,000 or 36%. The following is a summary of the distribution of deposits (in thousands):
09/30/07 | 12/31/06 | 09/30/06 | ||||||||||
Non-interest bearing: | ||||||||||||
Demand | $ | 92,770 | $ | 53,065 | $ | 54,292 | ||||||
Interest bearing: | ||||||||||||
Checking | $ | 65,751 | $ | 62,770 | $ | 101,587 | ||||||
Money market | 110,044 | 14,289 | 14,928 | |||||||||
Savings | 32,629 | 42,169 | 45,004 | |||||||||
Time, under $100,000 | 185,335 | 130,898 | 128,834 | |||||||||
Time, $100,000 and over | 375,005 | 330,025 | 306,466 | |||||||||
768,764 | 580,151 | 596,819 | ||||||||||
Total deposits | $ | 861,534 | $ | 633,216 | $ | 651,111 | ||||||
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 in 2007 was primarily due to the acquisition of Fidelity. Additional growth of $40,859,000 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 also utilizes 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):
09/30/07 | 12/31/06 | 09/30/06 | ||||||||||
Interest bearing checking | $ | 2,472 | $ | 889 | $ | 1,008 | ||||||
Time, $100,000 and over | 113,635 | 115,362 | 101,259 | |||||||||
Total municipal deposits | $ | 116,107 | $ | 116,251 | $ | 102,267 | ||||||
Brokered deposits are included in the Time, $100,000 and over category. Brokered deposits were $53,737,000, $56,000,000 and $56,018,000 at September 30, 2007, December 31, 2006 and September 30, 2006, respectively.
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Federal Funds Purchased. Federal funds purchased were $0 at September 30, 2007, compared to $37,300,000 at December 31, 2006. 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 September 30, 2007 were $491,000 compared to $619,000 at December 31, 2006, a decrease of $128,000 or 21%. These repurchase agreements are secured by securities held by the Bank.
Federal Home Loan Bank Advances. Federal Home Loan Bank advances were $36,429,000 at September 30, 2007 compared to $25,561,000 at December 31, 2006, an increase of $10,868,000 or 43%. 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 September 30, 2007 was $3,361,000 compared to $3,734,000 at December 31, 2006, a decrease of $373,000 or 10%. 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 September 30, 2007 were $619,000 compared to $516,000 at December 31, 2006, an increase of $103,000 or 20%. The increase was primarily due to the increase in expenses payable during the period.
Subordinated Debentures. Subordinated debentures were $10,000,000 at September 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 $66,000 at September 30, 2007.
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Capital
Stockholders’ equity at September 30, 2007 was $139,524,000 compared to $144,985,000 as of December 31, 2006, a decrease of $5,461,000 or 4%. The decrease was primarily due to the repurchase of 527,300 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 September 30, 2007 | ||||||||||||||||||||||||
Total capital (to risk weighted assets) | ||||||||||||||||||||||||
Consolidated | 114,242 | 11.67 | % | 78,337 | 8.00 | % | N/A | N/A | ||||||||||||||||
Bank | 109,223 | 11.18 | % | 78,144 | 8.00 | % | 97,680 | 10.00 | % | |||||||||||||||
Tier 1 capital (to risk weighted assets) | ||||||||||||||||||||||||
Consolidated | 103,933 | 10.61 | % | 39,168 | 4.00 | % | N/A | N/A | ||||||||||||||||
Bank | 98,914 | 10.13 | % | 39,072 | 4.00 | % | 58,608 | 6.00 | % | |||||||||||||||
Tier 1 capital (to average assets) | ||||||||||||||||||||||||
Consolidated | 103,933 | 10.33 | % | 40,258 | 4.00 | % | N/A | N/A | ||||||||||||||||
Bank | 98,914 | 9.87 | % | 40,070 | 4.00 | % | 50,088 | 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 September 30, 2007 and December 31, 2006, the Bank is 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, 2007, which are expected to mature or reprice in each of the time periods shown below.
Interest Rate Sensitivity Period | ||||||||||||||||||||
1-90 | 91-365 | 1-5 | Over | |||||||||||||||||
(In thousands) | Days | Days | Years | 5 Years | Total | |||||||||||||||
Earning assets | ||||||||||||||||||||
Federal funds sold | $ | 7,031 | $ | — | $ | — | $ | — | $ | 7,031 | ||||||||||
Interest bearing deposits with Banks | 100 | — | — | — | 100 | |||||||||||||||
Mortgage loans held for sale | 384 | — | — | — | 384 | |||||||||||||||
Securities available for sale | 5,741 | 3,915 | 838 | 146 | 10,640 | |||||||||||||||
Federal Home Loan Bank stock | 1,927 | — | — | — | 1,927 | |||||||||||||||
Total loans, net of non-accrual | 271,130 | 95,184 | 515,301 | 46,710 | 928,325 | |||||||||||||||
Total earning assets | 286,313 | 99,099 | 516,139 | 46,856 | 948,407 | |||||||||||||||
Interest bearing liabilities | ||||||||||||||||||||
Total interest bearing deposits | 391,287 | 323,268 | 53,689 | 520 | 768,764 | |||||||||||||||
Federal Home Loan Bank advances | 5,000 | 5,394 | 26,035 | — | 36,429 | |||||||||||||||
Other Borrowings | 491 | — | — | — | 491 | |||||||||||||||
Trust preferred securities | 10,000 | — | — | — | 10,000 | |||||||||||||||
Total interest bearing liabilities | 406,778 | 328,662 | 79,724 | 520 | 815,684 | |||||||||||||||
Net asset (liability) funding gap | (120,465 | ) | (229,563 | ) | 436,415 | 46,336 | $ | 132,723 | ||||||||||||
Cumulative net asset (liability) funding gap | ($120,465 | ) | ($350,028 | ) | $ | 86,387 | $ | 132,723 | ||||||||||||
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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, 2007 (in thousands):
Contractual Obligations | ||||||||||||||||||||
Payments Due By Period | ||||||||||||||||||||
Less Than | Over 5 | |||||||||||||||||||
1 Year | 1-3 Years | 3-5 Years | Years | Total | ||||||||||||||||
Securities sold under agreements to repurchase | $ | 491 | — | — | — | $ | 491 | |||||||||||||
Certificates of deposit | 506,131 | 36,061 | 17,628 | 520 | 560,340 | |||||||||||||||
Long-term borrowings | 10,394 | 25,625 | 410 | — | 36,429 | |||||||||||||||
Lease commitments | 748 | 1,347 | 540 | — | 2,635 | |||||||||||||||
Subordinated debentures | — | — | — | 10,000 | 10,000 | |||||||||||||||
Totals | $ | 517,764 | $ | 63,033 | $ | 18,578 | $ | 10,520 | $ | 609,895 | ||||||||||
Unused Loan Commitments and Letters of Credit
Amount Of Commitment Expiration Per Period | ||||||||||||||||||||
Less Than | Over 5 | |||||||||||||||||||
1 Year | 1-3 Years | 3-5 Years | Years | Total | ||||||||||||||||
Unused loan commitments | $ | 115,738 | $ | 13,933 | $ | 8,161 | $ | 14,972 | $ | 152,804 | ||||||||||
Standby letters of credit | 6,846 | 1,879 | — | 2,000 | 10,725 | |||||||||||||||
Totals | $ | 122,584 | $ | 15,812 | $ | 8,161 | $ | 16,972 | $ | 163,529 | ||||||||||
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DEARBORN BANCORP, INC. AND SUBSIDIARY
FORM 10-Q (continued)
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 September 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.
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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) A Form 8-K Report, dated July 17, 2007 was filed during the quarter ended September 30, 2007.
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DEARBORN BANCORP, INC.
FORM 10-Q (continued)
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 | ||||
Chairman | ||||
/s/ Michael J. Ross | ||||
President and Chief Executive Officer | ||||
/s/ Jeffrey L. Karafa | ||||
Treasurer and Chief Financial Officer |
Date: November 8, 2007
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