Dearborn Bancorp (DEAR) 10-Q 2007 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly period endedSeptember 30, 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

	Page
Part I. Financial Information:
Item 1. Financial Statements
The following consolidated financial statements of Dearborn Bancorp, Inc. and its subsidiary included in this report are:
Report of Independent Registered Public Accounting Firm		3
Consolidated Balance Sheets – September 30, 2007, December 31, 2006 and September 30, 2006		4
Consolidated Statements of Income — For the Three and Nine Months Ended September 30, 2007 and 2006		5
Consolidated Statements of Comprehensive Income — For the Three and Nine Months Ended September 30, 2007 and 2006		6
Consolidated Statements of Cash Flows — For the Three and Nine Months Ended September 30, 2007 and 2006		7
Notes to Consolidated Financial Statements		9-18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital		19-36
Item 3. Quantitative and Qualitative Disclosures about Market Risk		37-39
Item 4. Controls and Procedures		40
Part II. Other Information:
Pursuant to SEC rules and regulations, the following item(s) are included with the Form 10-Q Report:
Item 6. Exhibits and Reports on Form 8-K		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
SIGNATURES		42
Section 302 CEO Certification
Section 302 CFO Certification
Section 906 CEO Certification
Section 906 CFO Certification

2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have reviewed the consolidated balance sheets of Dearborn Bancorp, Inc. (“the Corporation”) as of 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

3

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.

4

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

	Three Months Ended							Nine Months Ended
(In thousands, except share and per share data)	09/30/07			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.

5

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.

6

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.

7

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.

8

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.	Accounting and Reporting Policies
	The consolidated financial statements of Dearborn Bancorp, Inc. (the “Corporation”) include the consolidation of its only subsidiary, Fidelity Bank (the “Bank”), formerly known as Community Bank of Dearborn. As discussed in Note 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.

9

A.	Accounting and Reporting Policies (con’t)
	Income Per Share
	Basic income per share is net income divided by the weighted average number of common shares outstanding during the period. Diluted income per share includes the dilutive effect of unvested stock awards and additional potential common shares issuable under stock options. Income per share is restated for all stock splits and dividends through the date of issue of the financial statements.
	Stock options for 35,244 and 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.

10

Effect of Newly Issued but not yet Effective Accounting Standards

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

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.

11

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

12

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.

13

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

14

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.

15

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.

17

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

18

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.

20

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

25

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.

36

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.

37

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

38

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

39

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

Item 4.Controls and Procedures

Disclosure Controls and Procedures–As of the end of the period covered by this report, the registrant carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures. Based on the review of the disclosure controls of the registrant, the Chief Executive Officer and the Chief Financial Officer have concluded that the registrant’s disclosure controls and procedures were effective as of 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.

40

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.

41

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

SIGNATURES

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

Dearborn Bancorp, Inc.
(Registrant)

/s/ John E. DemmerJohn E. Demmer

Chairman

/s/ Michael J. RossMichael J. Ross

President and Chief Executive Officer

/s/ Jeffrey L. KarafaJeffrey L. Karafa

Treasurer and Chief Financial Officer

Date: November 8, 2007

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