Dearborn Bancorp 10K 2008 Annual report | DEAR Filing

Exhibit 13

and its subsidiary

2008
ANNUAL REPORT

Dearborn Bancorp, Inc.

and its subsidiary

Fidelity Bank

CONTENTS


		Corporate Information			3

		Chairman’s and President’s Letter to Stockholders			4

		Summary of Selected Financial Data			7

		Report of Independent Registered Public Accounting Firm			9

		Management’s Report on Internal Control Over Financial Reporting			11

		Consolidated Balance Sheets			12

		Consolidated Statements of Income			13

		Consolidated Statements of Changes in Stockholders’ Equity			14

		Consolidated Statements of Cash Flows			17

		Notes to Consolidated Financial Statements			19

		Management’s Discussion and Analysis			55

		Dearborn Bancorp, Inc. Directors and Officers			80

		Fidelity Bank Directors and Executive Officers			81

		Fidelity Bank Officers			82

		Fidelity Bank Subsidiaries			83

		Investor Information			85

DESCRIPTION OF BUSINESS

Dearborn Bancorp, Inc.

Dearborn Bancorp, Inc. (the “Parent Company” and, together with its subsidiary, the “Corporation”) is a registered bank holding company which was incorporated on September 30, 1992. The primary purpose of the holding company is to own and operate the subsidiary bank, Fidelity Bank (the “Bank”). Dearborn Bancorp, Inc. trades on the Nasdaq Global Market under the symbol “DEAR”.

Fidelity Bank

The Bank was incorporated as Community Bank of Dearborn on June 28, 1993 and began operations as a state chartered commercial bank on February 28, 1994 from its main office located on Michigan Avenue in Dearborn. The Corporation acquired the Bank of Washtenaw on October 29, 2004. On January 4, 2007, the Corporation acquired Fidelity Financial Corporation of Michigan and its subsidiary, Fidelity Bank. On April 30, 2007, Community Bank of Dearborn was renamed Fidelity Bank.

The Bank offers a wide range of financial products and services. These include checking accounts, savings accounts, money market accounts, certificates of deposit, business checking, direct deposit, ATM services, telephone banking services, loan services (commercial, consumer, real estate mortgages), travelers’ checks, cashiers’ checks, wire transfers, safe deposit boxes, collection services, night depository service and internet banking services. The Bank does not have a trust department.

Internet banking can be utilized through the Bank’s website, www.fidbank.com. The Bank’s customers are able to execute transfers to their accounts and view their account information and transactions. Commercial customers have the option of utilizing the cash management module. This feature enables commercial customers to designate multiple users, initiate wire transfers, process ACH transactions, perform stop payments, and process federal tax payments. Over 1,000 users have signed up for online banking. The website also contains product information regarding the Bank’s loan and deposit products and the Corporation’s most recent financial information.

Community Bank Insurance Agency, Inc.

On August 19, 1997, the Bank formed Community Bank Insurance Agency, Inc. This company conducts limited insurance-related activities and holds a minority interest in MBT Title Services, LLC, a title insurance company.

Community Bank Mortgage, Inc.

On May 1, 2001, the Bank formed Community Bank Mortgage, Inc., a mortgage company that originates, sells and holds commercial and residential mortgage loans. On January 1, 2008, the operations of the mortgage company were merged into the Bank.

Community Bank Audit Services, Inc.

On March 13, 2002, the Bank formed Community Bank Audit Services, Inc., a company that offers internal auditing and compliance services to financial institutions.

To Our Stockholders,

When Fidelity Bank, then known as Community Bank of Dearborn, opened for business 15 years ago, our goal was to build a conservative, well-capitalized, mid-sized bank serving the southeast Michigan metropolitan area. Looking back, we followed our original business plan and developed a billion-dollar organization of which we are all proud. True, we did make occasional small changes in our course over the years, reflecting developments in the markets we serve. However, we have not strayed far from the path we first set out to follow in February, 1994.

From the beginning, we realized that financial conditions would vary over time. For that reason, we were always cautious lenders, seeking business from individuals and organizations that had good records of successful performance, strong cash flows, and ample collateral to secure the loans we made. We avoided excessive concentration of our business with any one borrower or in any single industry sector. We kept our deposit growth in line with our loan growth, seeking such growth only as we generated loan demand to utilize the funds. This was the formula for success used by well-managed banks for many years. What we could not foresee in 1994 was the economic recession of today and its particularly hard impact on Southeast Michigan.

We did anticipate some of the problems. We backed away from residential mortgage lending when credit standards began to deteriorate. We shunned the exotic securities that Wall Street created from dubious mortgages and other types of debt. We stuck to our core business of making well-secured loans to people and entities we knew in locations that were familiar to us.

However, the housing market spiraled downward far faster and farther than we could have predicted. In much of the country, a “bubble” that resulted when too many houses were built to sell at prices that rose too far too fast caused problems in the housing market. Here in Michigan, however, the collapse of the housing market was not caused by overbuilding, exorbitant prices, and wild speculation but by widespread unemployment and depressed business activity.

The distress in the housing market had a serious impact on our organization in 2008. We took large non-cash write-downs of goodwill and intangible assets reflecting the diminished stock value of our company. We recognized significant losses on defaulted loans and incurred multi-million dollar expenses related to the properties to which we took title in the course of the collection process.

Costs and charges related to troubled loans also served to depress 2008 earnings. We provided $14,606,000 for possible loan losses and incurred $2,078,000 in defaulted loan expenses. These expenses were largely maintenance, taxes, insurance, and related legal fees. We also had losses of $745,000 on the sale of repossessed real estate and wrote down the value of other real estate that we now own by $2,292,000.

When we acquired the Bank of Washtenaw in 2004 and Fidelity Bank in 2007, we identified core deposit and borrower relationship intangible assets of $12,970,000 related to these two transactions. We also valued the goodwill acquired with these institutions at $34,028,000. When we re-evaluated these assets in light of current economic conditions during the Fourth Quarter, we determined that it would be appropriate to recognize a $5,573,000 non-cash impairment of the intangible assets and write off all of the goodwill, resulting in another large non-cash charge.

As a consequence of the two non-cash charges to income and costs related to bad loans, we recorded a net loss of $31,925,000 for 2008. In comparison, we reported net income of $3,166,000 for 2007. This loss was the equivalent of a loss of $3.99 per fully diluted share in 2008 while the net income per share was $0.36 for 2007.

Because we have always operated under the principle that “there is no such thing as too much capital,” Fidelity Bank has been able to absorb these losses while remaining Well Capitalized according to regulatory guidelines. At the end of 2008, the Bank’s Total Capital to Risk Weighted Assets ratio was 10.47%, the Tier 1 Capital to Risk Weighted Assets ratio was 9.22%, and the Tier 1 Capital to Average Assets ratio was 8.69%. The guideline minimums to be well capitalized are 10.00%, 6.00%, and 5.00%, respectively.

Our situation has been further enhanced by the action of the FDIC to increase deposit insurance limits on most accounts significantly and remove all limits on some non-interest bearing accounts. Clearly, this has had a very beneficial effect on all banks. It is our opinion that this increased deposit insurance, along with the inherent strength of our own financial position, allows a Fidelity Bank customer to be confident that they are doing business with an institution that is safe and sound.

We did experience some compression in our net interest margin in 2008 due to the increase in non-performing loans and competitive pressures in both lending and deposit gathering. However, our net interest margin was 3.29% in 2008, which compares well with the average margin of 3.32% reported by the FDIC for banks with total assets of $1 billion or more at the end of the Third Quarter. It had been 3.48% in 2007.

We are pleased to report that we experienced modest growth during the past year in spite of the depressed state of the economy. Total Assets went up to $1,121,918,000 at the end of 2008 from $1,046,981,000 at the end of 2007, an increase of 7.16%. Total deposits grew to $938,395,000 at year-end while they had been $822,627,000 one year earlier. This was a healthy 14.07% increase. Total loans, however, declined to $933,269,000 from $952,084,000 or 1.98%. Some of this decline was due to net charge-offs of loans in the amount of $10,771,000 over the course of the year and some was attributable to our cautious approach to lending in a difficult environment.

We believe that we have identified our significant problems and are taking appropriate steps to deal with them. We have added four experienced workout specialists to our staff to help us deal with the problems in our loan portfolio. We are aggressively selling repossessed real estate even when we must do so at a further loss. We are intent on cleaning up our balance sheet as quickly as possible even as we recognize that there are no “quick fixes” in many situations. In short, we think that we know where we are, where we must go, and how best to get there.

Most important, we are continuing to provide our deposit and loan customers with the high quality service that led them to do business with us in the first place and then remain among our customers over time. We pay competitive rates on deposits and we have money to lend. In times like these, individuals and business organizations, whether they are borrowers or depositors, can rest easy when their accounts are at Fidelity Bank.

As you know, the last U.S. Congress passed a $700 billion Troubled Asset Relief Program (TARP) to assist banks caught up in the economic crisis last year. The Government could not let a significant number of banks, particularly the largest ones, fail. Essentially, program funds were used to buy preferred stock with common stock warrants attached in some banks. These funds were intended to allow these banks to liquidate portfolios of so-called toxic assets and absorb loan losses.

Initially, we were inclined to seek TARP money and applied for a $29 million investment. However, as the complete details of the program became clear, we withdrew our application. Our analysis indicated that the terms of the stock warrants we would be forced to issue with the preferred shares would excessively dilute the positions of our existing stockholders. In the end, we felt that a TARP capital infusion would neither advance the interests of our stockholders nor improve our operations.

Now, as we move into 2009, we believe that we are focused on the priorities that will allow us to prosper once again when the economy recovers. Highest among those priorities are improving our stock value, clearing up problems among our loans, liquidating repossessed property and other assets, and maintaining the high level of customer service that has been the key ingredient in our success over the past 15 years. We know that this will not be easy but we are confident that we have the experienced professionals on our staff who can accomplish the tasks ahead of us.

Our Annual Meeting of Stockholders will be held on May 19, 2009, at the Park Place, 23400 Park Avenue, Dearborn, Michigan, at 3:00 p.m. The directors and senior officers look forward to seeing you there, providing you with a more detailed report on our operations, answering your questions, and hearing your suggestions.

Sincerely,

John E. Demmer
Chairman of the Board

Michael J. Ross
President and
Chief Executive Officer

SUMMARY OF SELECTED FINANCIAL DATA

The following selected consolidated financial and other data as of and for each of the five years in the period ended December 31, 2008 should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Consolidated Balance Sheets as of December 31, 2008 and 2007, and the Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006 are included elsewhere in this Annual Report.


(In thousands, except share and per share data)	2008			2007			2006			2005			2004


OPERATIONS
Interest income	$	61,126		$	70,110		$	53,886		$	43,855		$	29,790
Interest expense		28,995			36,491			25,884			16,403			9,409

Net interest income		32,131			33,619			28,002			27,452			20,381
Provision for loan losses		14,606			5,821			943			1,081			1,400

Net interest income after provision for loan losses		17,525			27,798			27,059			26,371			18,981
Total non-interest income		(930	)		1,020			925			505			1,065
Total non-interest expense		65,007			23,796			16,225			15,499			11,700

Net income before federal income tax expense		(48,412	)		5,022			11,759			11,377			8,346
Income tax expense (benefit)		(16,487	)		1,856			3,940			3,867			2,837

Net income (loss)		($31,925	)	$	3,166		$	7,819		$	7,510		$	5,509


FINANCIAL CONDITION
Total assets	$	1,121,918		$	1,046,981		$	855,931		$	706,497		$	652,662
Mortgage loans held for sale		1,834			1,316			1,823			1,041			1,692
Investment securities, available for sale		84,148			8,902			5,878			17,153			21,075
Federal Home Loan Bank stock		3,614			2,072			1,288			1,293			1,122
Loans		933,269			952,084			756,420			657,037			587,562
Allowance for loan losses		(14,452	)		(10,617	)		(7,775	)		(6,808	)		(5,884	)
Other assets		113,505			93,224			98,297			36,781			26,226
Deposits		938,395			822,627			633,216			582,438			540,880
Federal Home Loan Bank advances		65,019			41,370			25,561			25,588			20,614
Subordinated debentures		10,000			10,000			10,000			10,000			10,000
Other borrowings		2,461			30,580			37,919			1,615			4,115
Other liabilities		2,732			4,856			4,250			2,643			2,449
Stockholders’ equity		103,311			137,548			144,985			84,213			74,604

PER SHARE INFORMATION (1)
Net income (loss) per common share — basic		($3.99	)	$	0.37		$	1.23		$	1.27		$	1.16
Net income (loss) per common share — diluted		($3.99	)	$	0.36		$	1.17		$	1.20		$	1.06
Book value per common share	$	12.54		$	16.70		$	16.15		$	14.11		$	12.80
Average shares outstanding — basic		8,007,345			8,602,704			6,372,471			5,899,281			4,767,907
Average shares outstanding — diluted		8,007,345			8,827,531			6,672,319			6,274,404			5,217,001
Shares outstanding at end of period		7,696,204			8,237,413			8,975,085			5,967,190			5,827,368

OTHER DATA
Return on average assets		-3.02	%		0.30	%		1.02	%		1.08	%		1.05	%
Return on average equity		-23.51	%		2.21	%		8.20	%		9.44	%		10.56	%
Net interest margin		3.29	%		3.48	%		3.80	%		4.14	%		4.04	%
Net interest spread		2.79	%		2.74	%		3.06	%		3.62	%		3.69	%
Allowance for loan losses to total loans		1.55	%		1.12	%		1.03	%		1.04	%		1.00	%
Nonperforming assets to total assets		5.51	%		2.42	%		0.90	%		0.26	%		0.47	%
Stockholders’ equity to total assets		9.21	%		13.14	%		16.94	%		11.92	%		11.43	%
Total interest expense to gross interest income		47.43	%		52.05	%		48.03	%		37.40	%		31.58	%
Number of Offices		18			19			12			12			12


(1)		All share and per share amounts have been adjusted to reflect the issuance of stock dividends.

COMMITMENT TO COMMUNITY

Commitment to community is one of the primary principles upon which Dearborn Bancorp, Inc. and its primary subsidiary, Fidelity Bank were founded. Since Fidelity Bank opened for business in 1994, management has emphasized the importance of community involvement and community development as part of the Bank’s mission. In fact, the majority of the Bank’s directors, officers and employees live in the communities that are serviced by the Bank. During 2008, the Bank provided the following local organizations with financial support or personal involvement:

Agape Christian Academy, Canton
American Arab Chamber of Commerce
Ann Arbor Board of Realtors
Ann Arbor Chamber of Commerce
Auburn Hills Chamber of Commerce
Birmingham Area Seniors (BASCC)
Birmingham Bloomfield Chamber of Commerce
Birmingham Lions Club
Birmingham Optimist Club
Boy Scouts of America
Boys & Girls Club of Troy
Canton Chamber of Commerce
Canton Community Foundation
Canton Exchange Club
Canton Lion’s Club
Canton Senior Center
Canton Senior Safety Coalition
Central Macomb Chamber of Commerce
Children’s Charitites Coalition
Clinton Township Community Blood Drive
Clinton Township Senior Expo
Cranbrook Swim Club
Dearborn Animal Shelter
Dearborn Baseball
Dearborn Board of Realtors
Dearborn Chamber of Commerce
Dearborn Elderfest
Dearborn Exchange Club
Dearborn Goodfellows
Dearborn Heights Chamber of Commerce
Dearborn Heights Lion’s Club
Dearborn Heights Parks and Recreation
Dearborn Heights Spirit Festival
Dearborn Homecoming
Dearborn Kiwanis
Dearborn Optimist Club
Dearborn Police Officers Charity
Dearborn Rotary Club
Dearborn Senior Center
Dearborn Symphony Orchestra
Divine Child School
Easter Seals of Michigan
Garden Club of Dearborn
Goodwill Industries of Greater Detroit
Habitat for Humanity
Hemophilia Foundation of Michigan
Henry Ford Community College Foundation
Junior League Goodwill
Kiwanis Club of Dearborn
Macomb County Treasurer’s Association
Mike Adray Memorial Foundation
Motor City Striders
Mount Clemens Lions Club
NAACP (Detroit Branch)
Northville Chamber of Commerce
Oakland County Community College
Oakwood Health Care Foundation
Plymouth Chamber of Commerce
RARE Foundation
Rochester Chamber of Commerce
Saline 4-H Farmers
Saline Area Chamber of Commerce
Showcase Plymouth
Southern Wayne County Chamber of Commerce
Southfield Area Chamber of Commerce
Southgate Senior Center
St Joseph Hospital
The Community House
Trenton Rotary Club
U of M Dearborn Alumni
Washtenaw County 4-H Fair
Washtenaw Housing Alliance
Wayne County Treasurers Association
West Washtenaw Business Association
Western Wayne Association of Realtors
YWCA of Western Wayne County

Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated balance sheet of Dearborn Bancorp Inc. as of December 31, 2008, and the related consolidated statements of income, stockholders’ equity and cash flows for the year ended December 31, 2008. The Corporation’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audit included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dearborn Bancorp, Inc. as of December 31, 2008, and the results of its operations and its cash flows for the year ended December 31, 2008, in conformity with accounting principles generally accepted in the Unites States of America.

As discussed in Note M, in 2008, the Corporation changed its method of accounting for fair value measurements in accordance with Statement of Financial Accounting Standards No. 157.



/s/ BKD, LLP
Indianapolis, Indiana
March 20, 2009

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheet of Dearborn Bancorp, Inc. and Subsidiary as of December 31, 2007, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the years ended December 31, 2007 and 2006. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dearborn Bancorp, Inc. and Subsidiary as of December 31, 2007, and the results of their operations and their cash flows for the years ended December 31, 2007 and 2006, in conformity with U. S. generally accepted accounting principles.



	/s/ Crowe Horwath LLP

Grand Rapids, Michigan
March 15, 2008

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining an effective system of internal control over financial reporting presented in conformity with generally accepted accounting principles. There are inherent limitations in the effectiveness of any system of internal control. Accordingly, even an effective system of internal control can provide only reasonable assurance with respect to financial statement preparation.

Management assessed the Corporation’s systems of internal control over financial reporting presented in conformity with generally accepted accounting principles as of December 31, 2008. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2008, Dearborn Bancorp, Inc. maintained effective control over financial reporting presented in conformity with generally accepted accounting principles based on those criteria.

The Corporation’s registered public accounting firm has issued an attestation report on our internal control over financial reporting.


Dearborn Bancorp, Inc. and Subsidiary
/s/ Michael J. Ross
Michael J. Ross
President and Chief Executive Officer


/s/ Jeffrey L. Karafa
Jeffery L. Karafa
Vice President, Treasurer and Secretary

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS


(Dollars, in thousands)	December 31,
	2008			2007
ASSETS
Cash and cash equivalents
Cash and due from banks	$	11,671		$	7,869
Federal funds sold		4,455			1,495
Interest bearing deposits with banks		36,876			118

Total cash and cash equivalents		53,002			9,482

Mortgage loans held for sale		1,834			1,316
Securities available for sale		84,148			8,902
Federal Home Loan Bank stock		3,614			2,072
Loans
Loans		933,269			952,084
Allowance for loan losses		(14,452	)		(10,617	)

Net loans		918,817			941,467

Premises and equipment, net		21,272			22,782
Real estate owned		9,657			6,319
Goodwill		—			34,028
Other intangible assets		4,592			11,133
Accrued interest receivable		3,499			3,816
Other assets		21,483			5,664


Total assets	$	1,121,918		$	1,046,981


LIABILITIES
Deposits
Non-interest bearing deposits	$	81,317		$	83,594
Interest bearing deposits		857,078			739,033

Total deposits		938,395			822,627

Other liabilities
Federal funds purchased		—			30,100
Securities sold under agreements to repurchase		2,461			480
Federal Home Loan Bank advances		65,019			41,370
Accrued interest payable		1,695			3,168
Other liabilities		1,037			1,688
Subordinated debentures		10,000			10,000

Total liabilities		1,018,607			909,433

STOCKHOLDERS’ EQUITY
Common stock — no par value 20,000,000 shares authorized, 7,696,204 and 8,237,413 shares outstanding in 2008 and 2007, respectively		131,784			134,278
Retained earnings		(28,675	)		3,250
Accumulated other comprehensive income		202			20

Total stockholders’ equity		103,311			137,548


Total liabilities and stockholders’ equity	$	1,121,918		$	1,046,981

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

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME


	Years Ended December 31,
(In thousands, except share data)	2008			2007			2006

Interest income
Interest on loans	$	60,533		$	68,947		$	52,321
Interest on securities, available for sale		464			603			834
Interest on deposits with banks		86			127			158
Interest on federal funds		43			433			573

Total interest income		61,126			70,110			53,886

Interest expense
Interest on deposits		25,106			33,303			23,447
Interest on other liabilities		3,889			3,188			2,437

Total interest expense		28,995			36,491			25,884

Net interest income		32,131			33,619			28,002
Provision for loan losses		14,606			5,821			943


Net interest income after provision for loan losses		17,525			27,798			27,059


Non-interest income
Service charges on deposit accounts		1,538			1,267			699
Fees for other services to customers		128			141			48
Gain on the sale of loans		165			163			145
Gain on the sale of securities		17			—			9
Loss on the sale of real estate owned		(745	)		(26	)		(103	)
Loss on the write-down of real estate owned		(2,292	)		(701	)		—
Other income		259			176			127

Total non-interest income		(930	)		1,020			925

Non-interest expense
Salaries and employee benefits		13,142			13,109			10,288
Occupancy and equipment expense		3,752			3,663			2,420
Amortization of intangible assets		968			1,328			250
Impairment of goodwill		34,028			—			—
Impairment of other intangible assets		5,573			—			—
FDIC assessment		696			424			75
Advertising and marketing		550			468			385
Stationery and supplies		592			617			402
Professional services		1,063			1,042			768
Data processing		848			716			531
Defaulted loan expense		2,078			685			78
Other operating expenses		1,717			1,744			1,028

Total non-interest expense		65,007			23,796			16,225


Income (loss) before federal income tax expense		(48,412	)		5,022			11,759
Income tax expense (benefit)		(16,487	)		1,856			3,940


Net income (loss)		($31,925	)	$	3,166		$	7,819

Per share data:
Net income (loss) — basic		($3.99	)	$	0.37		$	1.23
Net income (loss) — diluted		($3.99	)	$	0.36		$	1.17

Weighted average number of shares outstanding — basic		8,007,345			8,602,704			6,372,471
Weighted average number of shares outstanding — diluted		8,007,345			8,827,531			6,672,319

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

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, 2008, 2007 and 2006


							Accumulated
							Other			Total
	Common			Retained			Comprehensive			Stockholders'
(In thousands, except shares)	Stock			Earnings			Income (Loss)			Equity

Balance, January 1, 2006	$	83,684		$	573			($44	)	$	84,213

Issuance of common stock (2,918,250 shares)		55,131			—			—			55,131

Purchase of common stock (122,700 shares)		(2,824	)		—			—			(2,824	)

Stock awards earned (11,164 shares)		151			—			—			151

Stock options expense		67			—			—			67

Exercise of stock options (44,833 shares)		292			—			—			292

Tax benefit from exercise of stock options		98			—			—			98

Stock dividend #1 (272,754 shares)		4,115			(4,115	)		—			—

Stock dividend #2 (427,228 shares)		4,193			(4,193	)		—			—

Net income		—			7,819			—			7,819

Other comprehensive income
Changes in net unrealized loss on securities available for sale								68			68
Reclassification adjustment for gain included in net income		—			—			(9	)		(9	)

Net change in net unrealized loss on securities available for sale		—			—			59			59
Deferred tax effects								(21	)		(21	)

Other comprehensive income		—			—			38			38

Total comprehensive income											7,857



Balance, December 31, 2006	$	144,907		$	84			($6	)	$	144,985

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

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)

Years Ended December 31, 2008, 2007 and 2006


						Accumulated
						Other			Total
	Common			Retained		Comprehensive			Stockholders’
	Stock			Earnings		Income			Equity

Balance, December 31, 2006	$	144,907		$	84		($6	)	$	144,985

Purchase of common stock (751,800 shares)		(10,801	)		—		—			(10,801	)

Stock awards earned (613 shares forfeited)		(70	)		—		—			(70	)

Stock options earned		(30	)		—		—			(30	)

Exercise of stock options (14,741 shares)		62			—		—			62

Tax benefit from exercise of stock options		210			—		—			210

Net income		—			3,166		—			3,166

Other comprehensive income
Changes in net unrealized loss on securities available for sale							38			38
Reclassification adjustment for gain included in net income		—			—		—			—

Net change in net unrealized loss on securities available for sale		—			—		38			38
Deferred tax effects							(12	)		(12	)

Other comprehensive income		—			—		26			26

Total comprehensive income										3,192


Balance, December 31, 2007	$	134,278		$	3,250	$	20		$	137,548

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

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)

Years Ended December 31, 2008, 2007 and 2006


							Accumulated
							Other			Total
	Common			Retained			Comprehensive			Stockholders’
	Stock			Earnings			Income			Equity

Balance, December 31, 2007	$	134,278		$	3,250		$	20		$	137,548

Purchase of common stock (575,500 shares)		(2,627	)		—			—			(2,627	)

Stock awards earned		71			—			—			71
(43,883 shares granted, 9,592 shares forfeited)

Stock option expense		62			—			—			62

Net loss		—			(31,925	)		—			(31,925	)

Other comprehensive income
Changes in net unrealized gain on securities available for sale								293			293
Reclassification adjustment for gain included in net income		—			—			(17	)		(17	)

Net change in net unrealized gain on securities available for sale		—			—			276			276
Deferred tax effects								(94	)		(94	)

Other comprehensive income		—			—			182			182

Total comprehensive loss											(31,743	)


Balance, December 31, 2008	$	131,784			($28,675	)	$	202		$	103,311

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

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
(In thousands)	2008			2007			2006

Cash flows from operating activities
Interest and fees received	$	61,443		$	69,631		$	53,135
Interest paid		(30,468	)		(37,057	)		(23,833	)
Proceeds from sale of mortgages held for sale		19,817			20,841			22,339
Origination of mortgages held for sale		(20,041	)		(20,171	)		(22,789	)
Taxes paid		1,118			(3,529	)		(4,590	)
Gain (loss) on sale of real estate owned		(745	)		(26	)		(103	)
Cash paid to suppliers and employees		(15,622	)		(20,232	)		(14,146	)

Net cash provided by operating activities		15,502			9,457			10,013

Cash flows from investing activities
Sale of securities available for sale		7,276			18,007			96,704
Proceeds from calls, maturities and repayments of of securities available for sale		11,826			12,432			12,848
Purchases of securities available for sale		(93,935	)		(12,219	)		(97,941	)
(Purchase) sale of Federal Home Loan Bank stock		(1,542	)		(145	)		5
Increase in loans, net of payments received		(3,748	)		(27,004	)		(99,359	)
Purchases of property and equipment		(530	)		(999	)		(1,447	)
Net cash paid in Fidelity acquisition		—			(58,027	)		—

Net cash used in investing activities		(80,653	)		(67,955	)		(89,190	)

Cash flows from financing activities
Net decrease in non-interest bearing deposits		(2,277	)		(15,477	)		(6,587	)
Net increase in interest bearing deposits		118,045			17,253			57,365
Increase (decrease) in repurchase agreements		1,981			(139	)		(996	)
Net change in federal funds purchased		(30,100	)		(7,200	)		37,300
Federal Home Loan Bank advances		36,500			20,000			—
Repayments on Federal Home Loan Bank advances		(12,851	)		(5,958	)		(27	)
Issuance of common stock		—			—			55,131
Purchase of common stock		(2,627	)		(10,801	)		(2,824	)
Exercise of stock options		—			62			292
Tax benefit from the exercise of stock options		—			210			98

Net cash provided by (used in) financing activities		108,671			(2,050	)		139,752

Increase (decrease) in cash and cash equivalents		43,520			(60,548	)		60,575
Cash and cash equivalents at the beginning of year		9,482			70,030			9,455


Cash and cash equivalents at the end of year	$	53,002		$	9,482		$	70,030

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


	Years Ended December 31,
(In thousands)	2008			2007			2006

Reconciliation of net income to net cash provided by operating activities
Net income (loss)		($31,925	)	$	3,166		$	7,819
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		14,606			5,821			943
Depreciation and amortization expense		1,356			1,440			946
(Increase) decrease in deferred tax asset		(14,117	)		(386	)		(320	)
Restricted stock award expense		62			(70	)		151
Stock option expense		71			(30	)		67
Accretion of discount on investment securities		(162	)		(272	)		(277	)
Amortization of premium on investment securities		25			—			8
Write-down of real estate owned		2,292			701			—
Amortization of intangible assets		968			1,328			250
Impairment of goodwill		34,028			—			—
Impairment of other intangible assets		5,573			—			—
(Increase) decrease in mortgages held for sale		(518	)		507			(782	)
Increase in interest receivable		317			765			(751	)
Increase (decrease) in interest payable		(1,473	)		(903	)		2,051
(Gain) loss on sale of securities available for sale		—			—			(9	)
(Increase) decrease in real estate owned		6,162			25			—
(Increase) decrease in other assets		(1,112	)		(1,850	)		361
Increase (decrease) in other liabilities		(651	)		(785	)		(444	)


Net cash provided by operating activities	$	15,502		$	9,457		$	10,013


Supplemental noncash disclosures:
Transfers from loans to real estate owned	$	11,792		$	6,436		$	91

Noncash investing activities:
Fidelity Bank acquisition:
Loans acquired					178,052
Securities available for sale acquired					20,934
Federal Home Loan Bank stock acquired					639
Bank premises and equipment acquired					8,930
Acquisition intangibles recorded					38,975
Other assets acquired					2,194
Deposits assumed					(187,635	)
Federal Home Loan Bank advances assumed					(1,767	)
Other liabilities assumed					(2,295	)


				$	58,027

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

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008, 2007 and 2006

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows.

Nature of Operations and Principals of Consolidation

Dearborn Bancorp, Inc. (the “Corporation”) was incorporated in Michigan on September 30, 1992. The Corporation’s primary subsidiary, Community Bank of Dearborn (the “Bank”), began operations on February 28, 1994. As discussed in Note B, the Corporation acquired Fidelity Financial Corporation of Michigan on January 4, 2007 and merged its operations into the Bank. On April 30, 2007, the Community Bank of Dearborn was renamed Fidelity Bank. The Bank operates eighteen banking offices in Dearborn (2), Dearborn Heights, Plymouth Township, Canton Township, Clinton Township (2), Southgate, Auburn Hills, Saline, Ann Arbor (2), Birmingham, Bloomfield Township, Bingham Farms, Southfield (3) and Shelby Township in Michigan, offering a full range of banking services to individuals and businesses. The Bank also operates Community Bank Insurance Agency, Inc., an insurance agency with limited activities and Community Bank Audit Services, Inc., a company that offers internal auditing services to financial institutions.

The Bank’s primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are commercial, residential mortgage, and consumer loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets and real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Real estate loans are secured by both residential and commercial real estate. Other financial instruments which potentially represent concentrations of credit risk include deposit accounts in other financial institutions.

While the Corporation’s management monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Corporation-wide basis. Accordingly, all of the Corporation’s banking operations are considered by management to be aggregated in one reportable operating segment.

The consolidated financial statements include the accounts of Dearborn Bancorp, Inc. and its wholly-owned subsidiary, Fidelity Bank and its wholly-owned subsidiaries, Community Bank Mortgage, Inc., Community Bank Insurance Agency, Inc. and Community Bank Audit Services, Inc. All significant intercompany transactions are eliminated in consolidation.

Use of Estimates

In the preparation of financial statements, management is required to make estimates and assumptions that affect reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are more susceptible to change in the near term include the allowance for loan losses, fair value of real estate owned, fair value of certain financial instruments, and the carrying value of intangible assets.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cash Flows

For purposes of the consolidated statements of cash flows, the Corporation considers cash on hand, federal funds sold, and deposits with other banks to be cash equivalents. Net cash flows are reported for loan, deposit and short-term borrowing transactions.

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at the lower of cost or market on an aggregate basis. These loans are sold servicing released to other entities.

Securities

When securities are purchased and the Corporation intends to hold the securities for an indefinite period of time but not necessarily to maturity, they are classified as available for sale and carried at fair value. Any decision to sell a security available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Corporation’s assets and liabilities, liquidity demands, regulatory capital considerations, and other similar factors. Cost is adjusted for amortization of premiums and accretion of discounts to maturity. Unrealized gains and losses on available for sale securities are excluded from income and recorded, net of deferred income tax, in other comprehensive income and as a separate component of stockholders’ equity. All of the Corporation’s securities are classified as available for sale. Gains and losses on sales are based on the amortized cost of the security sold and securities are written down to fair market value when a decline in fair value is not temporary.

Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the Corporation’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs and an allowance for loan losses.

Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income on mortgage and commercial loans is generally discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Consumer loans are typically charged off no later than 180 days past due. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance when management believes the uncollectability of the loan balance is confirmed or when required by policy.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical or industry loss experience adjusted for current factors.

A loan is impaired when full payment under the loan terms is not expected. Loan relationships that are rated watch or worse with a balance above $150,000 are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the fair value of estimated future cash flows using the loan’s existing rate or at the fair value of the collateral if repayment is expected solely from the collateral.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Corporation, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Foreclosed Assets

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines below the new cost basis, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.

Premises and Equipment

Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:

Buildings and improvements — 10 to 39 years
Furniture and equipment — 3 to 10 years

Long-Term Assets

Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Federal Home Loan Bank (FHLB) Stock

The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Goodwill and Other Intangible Assets

Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified.

Other intangible assets consist of core deposit and business relationship intangible assets arising from bank acquisitions in 2004 and 2007. They are initially measured at fair value and are being amortized on an accelerated method over their estimated useful lives, which range from 10 to 11 years.

In addition to a quarterly review by management, goodwill and other intangible assets are evaluated annually by an outside consultant for impairment. If there is impairment, a non-cash impairment expense is recorded.

Stock Compensation

Effective January 1, 2006, the Corporation adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-based Payment”, using the modified prospective transition method. Accordingly, the Company has recorded stock-based employee compensation cost using the fair value method starting in 2006.

The Corporation has two incentive stock plans. Employee compensation expense under the 1994 Stock Option Plan was reported using the intrinsic value method. No stock-based compensation cost from this plan is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant.

Employee compensation expense under the 2005 Long Term Incentive Plan is reported using the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-based Compensation”.

Loan Commitments and Related Financial Instruments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Stock Dividends

The fair value of shares issued in stock dividends is transferred from retained earnings to common stock. All share and per share amounts are retroactively adjusted for stock dividends.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes

The Corporation files a consolidated federal income tax return. Income tax expense is the total of federal income tax due or refundable and the change in deferred tax assets and liabilities. The Corporation uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. A valuation allowance, if needed, reduces deferred tax amounts to the amount expected to be realized.

The Corporation adopted FASB Interpretation 48,Accounting for Uncertainty in Income Taxes (“FIN 48”), 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 likely than not” test, no tax benefit is recorded. The adoption had no affect on the Corporation’s financial statements.

The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense.

Reclassifications

Some items in the prior year financial statements were reclassified to conform to the current presentation. These reclassifications had no impact on net income.

Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

Earnings Per Share

Basic earnings per share is net income (loss) divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings per share is restated for all stock splits and dividends through the date of issue of the financial statements.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, net of deferred income tax, which are also recognized as separate components of equity.

Restrictions on Cash

The Corporation was required to have $1,917,000 and $25,000 of cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements at year end 2008 and 2007, respectively. These balances do not earn interest.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Dividend Restrictions

Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Corporation or by the Corporation to stockholders.

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Valuation Measurements

Valuation methodologies often involve a significant degree of judgment, particularly when there are no observable active markets for the items being valued. Investment securities and residential mortgage loans held for sale are carried at fair value, as defined in SFAS No. 157 “Fair Value Measurement” (“SFAS No. 157”), which requires key judgments affecting how fair value for such assets and liabilities is determined. In addition, the outcomes of valuations have a direct bearing on the carrying amounts for goodwill, and intangibles assets. To determine the values of these assets and liabilities, as well as the extent to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment rates and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect the Corporation’s results of operations.

Adoption of New Accounting Standards

Effective January 1, 2008, the Corporation adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”) for existing fair value measurement requirements related to financial and nonfinancial assets and liabilities. SFAS 157 establishes a hierarchy to be used in performing measurements of fair value. Additionally, SFAS 157 emphasizes that fair value should be determined from the perspective of a market participant while also indicating that valuation methodologies should first reference available market data before using internally developed assumptions. SFAS 157 also provides expanded disclosure requirements regarding the effects of fair value measurements on the financial statements. The adoption of SFAS 157 did not have a material impact on the consolidated financial condition or results of operations, or liquidity.

On October 10, 2008, the Financial Accounting Standards Board (“FASB”) issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS 157-3”). FSP FAS 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key consideration in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 is effective upon issuance, including prior periods for which financial statements have not been issued. The Corporation adopted FSP FAS 157-3 for the period ended September 30, 2008 and the adoption did not have any significant impact on consolidated statements of financial position, consolidated statement of operations, or disclosures.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Effect of Newly Issued But Not Yet Effective Accounting Standards

During December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (Revised 2007), Business Combinations (“SFAS 141(R)”). This Statement replaces SFAS 141 “Business Combinations” (“Statement 141”). SFAS 141(R) retains the fundamental requirements in Statement 141 that the acquisition method of accounting (called the ‘purchase method’) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement defines the acquirer as the entity that obtains control of one or more businesses, including those sometimes referred to as “true mergers” or “mergers of equals” and combinations achieved without the transfer of consideration, for example, by contract alone or through the lapse of minority veto rights. This is broader than in Statement 141 which applied only to business combinations in which control was obtained by transferring consideration. This Statement requires an acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. SFAS 141(R) recognizes and measures the goodwill acquired in the business combination and defines a bargain purchase as a business combination in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any noncontrolling interest in the acquiree, and it requires the acquirer to recognize that excess as a gain attributable to the acquirer. In contrast, Statement 141 required the “negative goodwill” amount to be allocated as a pro rata reduction of the amounts assigned to assets acquired. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after December 15, 2008. An entity may not apply it before that date.

During December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 established accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statement, but separate from the parent’s equity. Before the Statement was issued these so-called minority interests were reported in the consolidated statement of financial position as liabilities or in the mezzanine section between liabilities and equity. The amount of consolidated net income attributable to the parent and to the noncontrolling interest must be clearly identified and presented in the consolidated statement of income. This Statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. Management does not anticipate that this Statement will have a material impact on the Corporation’s consolidated financial condition or results of operations.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Effect of Newly Issued But Not Yet Effective Accounting Standards

During March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 amends and expands the disclosure requirement of SFAS 133 No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. To meet those objectives, SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early application is encouraged. Management does not anticipate that this Statement will have a material impact on the Corporation’s consolidated financial condition or results of operations.

During May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States. This Statement is effective 60 days following the SEC approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” Adoption of SFAS 162 will not be a change in the Corporation’s current accounting practices; therefore, it will not have a material impact on the Corporation’s consolidated financial condition or results of operations.

During June 2008, the FASB issued FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 clarifies whether instruments, such as restricted stock, granted in share-based payments are participating securities prior to vesting. Such participating securities must be included in the computation of earnings per share under the two-class method as described in SFAS No. 128, “Earnings per Share.” FSP EITF 03-6-1 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008, and requires a company to retrospectively adjust its earning per share data. Early adoption is not permitted. It is not expected that the adoption of FSP EITF 03-6-1 will have a material effect on consolidated results of operations or earnings per share.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE B — ACQUISITION

On January 4, 2007, the Corporation acquired the Fidelity Financial Corporation of Michigan (Fidelity) for approximately $70,500,000 in cash. As of January 4, 2007, the assets and liabilities of Fidelity at acquisition and net income derived from those assets and liabilities since the acquisition have been consolidated into the Bank. 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 $179,600,000 and total deposits of $187,547,000.

The acquisition has been accounted for using the purchase method of accounting and accordingly, the purchase price has been allocated to the tangible and identified intangible assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. Identified intangible assets and purchase accounting fair value adjustments are being amortized under various methods over the expected lives of the corresponding assets and liabilities. Goodwill will not be amortized, but will be reviewed for impairment on an annual basis. Goodwill and other intangible assets are tax deductible over 15 years. Identified intangible assets subject to amortization were $10,421,000. Goodwill recorded was $28,555,000.

Subsequent to an analysis of goodwill and other intangible assets during the fourth quarter of 2008, the Corporation recorded impairment expense of goodwill in the amount of $28,555,000 and impairment expense of other intangible assets in the amount of $4,561,000 related to the acquisition of Fidelity. At December 31, 2008, intangible assets related to the acquisition of Fidelity were $4,010,000.

The following table presents pro forma information for the Corporation including the acquisition of Fidelity for the year ended December 31, 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.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE B — ACQUISITION (Continued)

Pro Forma Income Statement for the year ended December 31, 2006 (unaudited)

(In thousands, except share and per share data)


Interest income	$	69,183
Interest expense		30,719


Net interest income		38,464
Provision for loan losses		1,343


Net interest income after provision for loan losses		37,121

Non-interest income		2,139
Non-interest expense		24,930


Income before income tax provision		14,330
Income tax provision		4,814


Net income	$	9,516


Per share data:
Net income — basic	$	1.07
Net income — diluted	$	1.04

Weighted average shares outstanding — basic		8,882,966
Weighted average shares outstanding — diluted		9,182,814

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE C — SECURITIES AVAILABLE FOR SALE

The amortized cost and fair value for securities available for sale and the unrealized gains and losses recognized as accumulated other comprehensive income were as follows (in thousands):


	December 31, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

US Government sponsored entity securities	$	21,175	$	226		($2	)	$	21,399
Corporate bonds		13,185		54		(4	)		13,235
Municipal securities		1,303		28		—			1,331
Mortgage backed securities		179		4		—			183
Money market mutual funds		48,000		—		—			48,000


Totals	$	83,842	$	312		($6	)	$	84,148


	December 31, 2007
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

US Treasury securities	$	6,800	$	15		($10	)	$	6,805
US Government sponsored entity securities		1,009		4		—			1,013
Municipal securities		758		16		—			774
Mortgage backed securities		305		5		—			310


Totals	$	8,872	$	40		($10	)	$	8,902

The amortized cost and fair value of securities available for sale at December 31, 2008 by contractual maturity are shown below (in thousands). Securities not due at a single maturity date, such as mortgage backed securities and money market mutual funds are shown separately.


	Amortized		Fair
	Cost		Value

Due in less than one year	$	5,073	$	5,089
Due in one year through five years		30,309		30,592
Due in greater than five years		281		284
Mortgage backed securities		179		183
Money market mutual funds		48,000		48,000


Totals	$	83,842	$	84,148

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE C — SECURITIES AVAILABLE FOR SALE (Continued)

Sales of available for sale securities for the years ended December 31, are as follows (in thousands):


	2008		2007		2006

Proceeds	$	7,276	$	18,007	$	96,704
Gross gains		17		—		9
Gross losses		—		—		—

Securities having a carrying value of $5,524,000 and $8,478,000 at December 31, 2008 and 2007, respectively, were pledged to secure Federal Home Loan Bank of Indianapolis advances, time deposits and securities sold under agreements to repurchase.

Securities with unrealized losses at year-end 2008 and 2007, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:


						December 31, 2008
Investment category	Less than one year					One year or more				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Loss			Value		Loss		Value		Loss

US Government sponsored entity securities	$	5,997		($2	)	$	—	$	—	$	5,997		($2	)
Corporate bonds		2,041		(4	)		—		—		2,041		(4	)


Total temporarily impaired	$	8,038		($6	)	$	—	$	—	$	8,038		($6	)


						December 31, 2007
Investment category	Less than one year					One year or more				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Loss			Value		Loss		Value		Loss

US Treasury securities	$	2,330		($10	)	$	—	$	—	$	2,330		($10	)


Total temporarily impaired	$	2,330		($10	)	$	—	$	—	$	2,330		($10	)

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE C — SECURITIES AVAILABLE FOR SALE (Continued)

Unrealized losses on securities available for sale at December 31, 2008 and 2007 have not been recognized because these securities are of high credit quality and management has the intent and ability to hold these securities to recovery, which may be maturity. 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 securities approach their maturity date.

NOTE D — LOANS

Major categories of loans included in the portfolio at December 31 are as follows (in thousands):


	2008			2007			Incr(decr)

Consumer loans	$	31,864		$	35,833			(11.08	%)
Commercial, financial, & other		164,740			174,958			(5.84	%)
Construction and land development loans		113,035			147,750			(23.50	%)
Commercial real estate mortgages		571,204			539,306			5.91	%
Residential real estate mortgages		52,426			54,237			(3.34	%)


Total loans		933,269			952,084			(1.98	%)

Allowance for loan losses		(14,452	)		(10,617	)


Loans, net	$	918,817		$	941,467

Certain directors and executive officers of the Corporation, including their related interests, were loan customers of the Bank during 2008 and 2007. These loan transactions for the years ended December 31, are as follows (in thousands):


	2008			2007

Balance, beginning of year	$	2,494		$	2,497
New loans during the year		9			181
Repayments made during the year		(461	)		(184	)


Balance, end of year	$	2,042		$	2,494

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE D — LOANS (Continued)

Activity in the allowance for loan losses for the years ended December 31 are as follows (in thousands):


	2008			2007			2006

Balance, beginning of year	$	10,617		$	7,775		$	6,808

Allowance on loans acquired		—		$	1,704			—

Less charge-offs:
Consumer loans		318			226			24
Commercial, financial & other		4,304			914			139
Construction and land development loans		3,604			2,956			—
Commercial real estate mortgages		2,446			662			36
Residential loans		296			320			38

Plus recoveries:
Consumer loans		19			25			17
Commercial, financial & other		117			224			218
Construction and land development loans		36			6			—
Commercial real estate mortgages		21			140			26
Residential loans		4			—			—


Net charge-offs (recoveries)		10,771			4,683			(24	)

Provision for loan losses		14,606			5,821			943


Balance at end of year	$	14,452		$	10,617		$	7,775


Allowance to total loans		1.55	%		1.12	%		1.03	%


Net Charge-offs to average loans		1.14	%		0.50	%		0.00	%

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE D — LOANS (Continued)

The aggregate balances in impaired loans at December 31, are as follows (in thousands):


	2008		2007		2006

Impaired loans with no allocated allowance for loan losses	$	71,961	$	27,817	$	1,306
Impaired loans with allocated allowance for loan losses		26,908		10,816		4,254


Total (net of $3,405 in partial charge offs in 2007)	$	98,869	$	38,633	$	5,560


Amount of the allowance for loan loss allocated to impaired loans	$	5,273	$	879	$	911

Average of impaired loans during the year	$	82,436	$	29,492	$	3,788

Interest income recognized during impairment	$	1,460	$	1,086	$	—
Cash-basis interest income recognized	$	—	$	—	$	—

Non-performing assets were as follows (in thousands):


	2008		2007		2006

Troubled debt restructuring		17,765	$	—	$	—
Over 90 days past due and still accruing		450		884		2,101
Non-accrual loans		51,708		18,117		5,560

Total non performing loans		69,923		19,001		7,661

Real estate owned		9,657		6,319		52
Other repossessed assets		—		—		2

Other non performing assets		9,657		6,319		54

Total nonperforming assets	$	79,580	$	25,320	$	7,715

Non-performing loans and impaired loans are defined differently. Non-performing loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Non-performing loans included troubled debt restructuring of $17,765,000 at December 31, 2008. These loans were qualified as troubled debt restructuring due to changes from principal and interest payments to interest only payments, restructuring of collateral, or renewals of interest reserves when current loan to value ratios were outside of our normal loan policy. In all cases, no additional valuation allowances were recorded against the loans since all of the modifications related to terms other than interest rates or principal balances. All of these loans are current according to their renegotiated terms.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE E — PREMISES AND EQUIPMENT

Premises and equipment are comprised of the following at December 31 (in thousands):


	2008		2007

Land and improvements	$	7,728	$	7,853
Buildings and improvements		14,553		15,119
Furniture and equipment		6,771		6,277

		29,052		29,249

Less accumulated depreciation		7,780		6,467


	$	21,272	$	22,782

Depreciation expense for 2008, 2007 and 2006 amounted to $1,355,000, $1,440,000 and $946,000, respectively. During 2008, the Corporation transferred a building with a net book value of approximately $685,000 to other assets. This building is not being utilized and is currently listed for sale. The fair value of this building is evaluated periodically for impairment. This analysis is expected to be completed during the first quarter of 2009. Capital expenditures were primarily due to various improvements in technology.

Rent expense for facilities of $1,064,000, $829,000 and $622,000 was incurred during 2008, 2007 and 2006, respectively. Rental commitments under noncancellable operating leases are as follows, before considering renewal options that generally are present (in thousands):


2009	$	783
2010		631
2011		449
2012		48
2013		25
Thereafter		—


Total	$	1,936

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE F — GOODWILL AND OTHER INTANGIBLE ASSETS

The Corporation acquired Fidelity Financial Corporation of Michigan (Fidelity) and the Bank of Washtenaw (Washtenaw) in January of 2007 and October of 2004, respectively. As a result of these acquisitions, the Corporation acquired goodwill and other intangible assets. Both of these acquisitions were consolidated into the Bank along with the goodwill and other intangible assets. The Corporation identified a core deposit intangible of $6,863,000 and a borrower relationship intangible of $3,558,000 related to the acquisition of Fidelity. The Corporation identified a core deposit intangible of $929,000 and a borrower relationship intangible of $1,620,000 related to the acquisition of Washtenaw. These intangible assets were separated from goodwill. These assets are evaluated at least annually for impairment. The Corporation recorded amortization expense of $968,000, $1,328,000 and $250,000 in 2008, 2007 and 2006, respectively. Goodwill amounted to $0 and $34,028,000 at December 31, 2008 and 2007, respectively.

During the fourth quarter of 2008, the significant decline in the market value of the Corporation’s stock below its book value and the decline in the economic environment in which the Corporation operates caused management to engage a third party business valuation specialist to perform the annual impairment test of goodwill and other intangible assets. The third party specialist used three methods of evaluation to determine the fair value of the reporting unit, Fidelity Bank. These methods considered the Bank’s discounted future earnings, the stock price of the Corporation and other comparable financial institutions and the equity values of other companies that have been sold. The value of each approach was weighted and an overall summary of the Bank’s fair value was calculated.

The step one impairment test indicated that the implied fair value of Fidelity Bank was well below the carrying amount as of December 31, 2008. Subsequently, management performed its own internal step two impairment testing by allocating the implied fair value of the Bank to all of the assets and liabilities of the reporting unit. The implied fair value of the Bank was then compared to the actual carrying amount of goodwill. From this testing, management determined the carrying amount of goodwill exceeded in its entirety the implied fair value of goodwill.

Additionally, the Corporation recorded impairment expense of other intangible assets. The Corporation recorded impairment expense of the core deposit intangible in the amount of $2,991,000 and impairment expense of the customer relationship intangibles in the amount of $1,570,000 related to the acquisition of Fidelity. The Corporation also recorded impairment expense of the core deposit intangible in the amount of $806,000 and impairment expense of the customer relationship intangibles in the amount of $206,000 related to the acquisition of Washtenaw. The impairment to the core deposit intangibles was primarily due to the erosion of core deposits at a faster rate than anticipated and the transfer of core deposits to time deposits. The impairment of the customer relationship intangible is primarily due to the migration of loans at a more rapid rate than expected and the impact of current economic conditions on the loan portfolio. The impairment resulted in the establishment of a new carrying amount. Information concerning other intangible assets at December 31, 2008 and 2007 were as follows (in thousands):

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE F — GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)


	2008
	Gross
	Carrying		Accumulated
	Amount		Amortization
Amortized intangible assets

Core deposit intangible	$	2,757	$	—
Borrower relationship intangible		1,835		—

Total	$	4,592	$	—


	2007
	Gross
	Carrying		Accumulated
	Amount		Amortization
Amortized intangible assets

Core deposit intangible	$	7,792	$	1,180
Borrower relationship intangible		5,178		657

Total	$	12,970	$	1,837

The core deposit intangible is amortized over 11 years and the borrower relationship intangible is amortized over 10 years. Estimated amortization expense for each of the next five years is as follows (in thousands):


	Amortization

2009	$	793
2010		718
2011		643
2012		568
2013		493

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE G — DEPOSITS

Time deposits of $100,000 or more were $324,420,000 and $344,026,000 at December 31, 2008 and 2007, respectively. Time deposits of $100,000 or more from governmental units, which are included in total time deposits of $100,000 or more were $38,999,000 and $103,795,000 at December 31, 2008 and 2007, respectively.

Scheduled maturities of time deposits at December 31, 2008 are listed in the following table (in thousands):


	$100,000 and over		Less than $100,000		Total

2009	$	242,882	$	111,284	$	354,166
2010		72,969		92,541		165,510
2011		7,856		6,627		14,483
2012		612		330		942
2013 and thereafter		101		327		428


Totals	$	324,420	$	211,109	$	535,529

Related party deposits from directors and executive officers of the Corporation were approximately $6,701,000 and $6,475,000 at December 31, 2008 and 2007, respectively.

NOTE H — SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase are secured by US government sponsored entity securities with a carrying amount of approximately $3.0 million and $1.0 million at December 31, 2008 and 2007, respectively.

Securities sold under agreements to repurchase are financing arrangements that mature within two years. At maturity, the securities underlying the agreements are returned to the Corporation. Information concerning securities sold under agreements to repurchase is summarized as follows (in thousands):


	2008			2007

Balance at year-end	$	2,461		$	481
Average daily balance during the year	$	778		$	433
Average interest rate during the year		1.25	%		1.25	%
Maximum month-end balance during year	$	2,461		$	841
Weighted average interest rate at year-end		1.25	%		1.25	%

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE J — FEDERAL HOME LOAN BANK ADVANCES

The Bank has entered into an Advances, Pledge and Security Agreement with the Federal Home Loan Bank of Indianapolis (FHLB). Advances were $65,019,000 and $41,370,000 at December 31, 2008 and 2007, respectively. These advances carry a fixed rate of interest and are secured by a blanket collateral agreement with the Federal Home Loan Bank of Indianapolis covering eligible mortgage loans in the amount of $46,917,000, commercial real estate loans in the amount of $86,179,000 and securities available for sale in the amount of $295,000. Federal Home Loan Bank advances are comprised of the following at December 31, 2008 and 2007 (in thousands):


At December 31, 2008
Maturing in:	Amount		Rate

2009	$	20,000		4.76	%
2010		30,184		3.27	%
2011		4,500		3.20	%
2012		335		5.27	%
2013		10,000		2.58	%

Total	$	65,019		3.63	%


At December 31, 2007
Maturing in:	Amount		Rate

2008	$	20,658		4.79	%
2009		20,000		4.76	%
2010		302		4.05	%
2012		410		5.27	%

Total	$	41,370		4.77	%

The Bank makes monthly interest payments with principal generally due at maturity. Prepayment penalties apply if advances are repaid prior to maturity. The Bank’s capacity to borrow from the Federal Home Loan Bank is capped at $100 million by a resolution of the Board of Directors of the Bank. The Bank had the ability to borrow up to $69.7 million based on collateral pledged by the Bank at December 31, 2008.

Required payments over the next five years are as follows:


	Amount
2009	$	20,164
2010		30,139
2011		4,548
2012		168
2013		10,000

Total	$	65,019

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE J — FEDERAL HOME LOAN BANK ADVANCES (Continued)

Amounts advanced by the FHLB totaling $10,000,000 are subject to an option for the FHLB to convert the entire advance to a periodic adjustable rate one year after the date of the advance. If the FHLB exercises its option to convert the advance to an adjustable rate, the advance will be pre-payable at the Corporation’s option, at par without a penalty.

NOTE K — SUBORDINATED DEBENTURES

In 2002, Dearborn Bancorp Trust I, a special purpose entity formed by the Corporation, issued $10,000,000 of floating rate mandatory redeemable securities as part of a pooled offering. The Corporation issued $10,000,000 of subordinated debentures to the trust in exchange for the proceeds of the offering. The interest rate on the debentures is the three month LIBOR plus 3.35% and was 8.17% at December 31, 2008. The securities have a term of thirty years with interest payments due on a quarterly basis. The Corporation may redeem the debentures, with regulatory approval, at face value.

NOTE L — INCOME TAXES

The federal tax provision consists of the following (in thousands):


	2008			2007			2006

Current		($2,370	)	$	1,991		$	4,260
Deferred		(14,117	)		(386	)		(320	)
Change in valuation allowance		—			251			—

		($16,487	)	$	1,856		$	3,940

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE L — INCOME TAXES (Continued)

Deferred tax assets and liabilities are due to the following at December 31, (in thousands):


	2008			2007
Deferred tax assets
Allowance for loan losses	$	4,913		$	3,326
Deferred loan fees and costs		—			49
Goodwill and other intangibles		11,877			—
Capital loss carryforward		251			251
Valuation allowance on capital loss carryforward		(251	)		(251	)
Non accrual interest income		92			241
Writedowns on other real estate owned		462			255
Amortization of deferred issue costs		81			—
Other		63			41

Total deferred tax assets		17,488			3,912

Deferred tax liabilities
Premises and equipment		(300	)		(183	)
Goodwill and other intangibles		—			(841	)
Prepaid expenses		(259	)		(131	)
Unrealized gains on securities available for sale		(104	)		(10	)
Deferred loan fees and costs		(73	)		—
Other		(66	)		(84	)

Total deferred tax liabilities		(802	)		(1,249	)

Net deferred tax asset (liability)	$	16,686		$	2,663

The goodwill and other intangible assets acquired during 2004 and 2007 are being amortized over 15 years for tax purposes and are tax deductible, but the goodwill is not being amortized for book purposes. The impairment of goodwill and partial impairment of other intangible assets generated a deferred tax asset of $13,464,000 during 2008. During 2005, a deferred tax asset of $251,000 was generated on the capital loss that resulted from the sale of FHLMC preferred stock. The capital loss can be carried forward through 2010 to offset capital gain income. A valuation allowance against this tax deferred asset was assigned during 2007 for this item based on the likelihood that the capital loss carryforward will expire prior to its utilization.

The recoverability of the deferred tax asset, which is primarily due to the future deductability of goodwill, core deposit intangible and the allowance for loan losses, is contingent upon future book income. The Corporation believes that future income will support this deferred tax asset and believes that no valuation allowance is necessary.

There were no unrecognized tax benefits at December 31, 2008, and the Corporation does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.

The Corporation is no longer subject to examination by the Internal Revenue Service for years before 2007.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE L — INCOME TAXES (Continued)

Effective tax rates differ from the federal statutory rate of 34% applied to income before income taxes due to the following:


	2008			2007			2006

Federal income tax rate		34	%		34	%		34	%

Effect of capital loss carryforward valuation allowance		—	%		5	%		—	%
Other, net		—	%		(2	%)		—	%


Effective tax rate		34	%		37	%		34	%

NOTE M — FINANCIAL INSTRUMENTS AND LOAN COMMITTMENTS

Fair Value of Financial Instruments

The estimated fair value of the Corporation’s financial instruments at December 31 are as follows (in thousands):


	2008				2007
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value

Assets:
Cash and cash equivalents	$	53,002	$	53,002	$	9,482	$	9,482
Mortgage loans held for sale		1,834		1,861		1,316		1,334
Securities available for sale		84,148		84,148		8,902		8,902
Federal Home Loan Bank Stock		3,614		3,614		2,072		2,072
Loans, net		933,269		934,826		952,084		962,383
Accrued interest receivable		3,499		3,499		3,816		3,816

Liabilities:
Deposits		938,395		945,017		822,627		824,649
Federal funds purchased		—		—		30,100		30,100
Securities sold under agreements to repurchase		2,461		2,461		480		480
Federal Home Loan Bank advances		65,019		66,390		41,370		41,736
Subordinated debentures		10,000		10,028		10,000		10,000
Accrued interest payable		1,695		1,695		3,168		3,168

The following methods and assumptions were used by the Corporation in estimating its fair value disclosure for financial instruments:

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE M — FINANCIAL INSTRUMENTS AND LOAN COMMITTMENTS (Continued)

Carrying amount is the estimated fair value for cash and cash equivalents, Federal Home Loan Bank stock, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently or fully. Security fair values are based on market prices or dealer quotes and, if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. The fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements, and is not considered material to this presentation.

Effective January 1, 2008, the Corporation adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 has been applied prospectively as of the beginning of 2008.

SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to our valuation hierarchy.

Securities available for sale

One component of the Corporation’s securities, available for sale are money market funds that are based on quoted prices in active markets and are classified within Level 1 of the valuation hierarchy. The values of all other securities, available for sale are estimated by a third party using inputs that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy.

The following table presents the fair value measurements of the Corporation’s assets and liabilities recognized in the accompanying balance sheet measured at fair value on a recurring basis and the level within the SFAS 157 fair value hierarchy in which the fair value measurements fall at December 31, 2008 (in thousands):

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE M — FINANCIAL INSTRUMENTS AND LOAN COMMITTMENTS (Continued)

Quoted Prices in

Significant Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Fair Value

(Level 1)

(Level 2)

(Level 3)

Securities, available for sale

84,148

48,000

36,148

—

Following is a description of the valuation methodology for assets and liabilities measured at fair value and recognized in the accompanying balance sheet.

Impaired Loans

Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate, or the fair value of collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to increase, such increase is reported as a component of the provision for loan losses. Loan losses are charged against the allowance when management believes the uncollectability of the loan is confirmed. During the year ended December 31, 2008, certain impaired loans were partially charged-off or re-evaluated. This valuation would be considered Level 3, consisting of appraisals of underlying collateral and discounted cash flow analysis.

The following table presents the fair value measurements of the Corporation’s assets and liabilities recognized in the accompanying balance sheet measured at fair value on a non-recurring basis and the level within the SFAS 157 fair value hierarchy in which the fair value measurements fall at December 31, 2008 (in thousands):

Quoted Prices in

Significant Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Fair Value

(Level 1)

(Level 2)

(Level 3)

Loans

41,907

—

41,907

Loan Committments

Some financial instruments, such as loan commitments, credit lines, letters of credit and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same policies are used to make such commitments as are used for loans, including obtaining collareral at exercise of the commitment.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE M — FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET RISK (Continued)

The Corporation had outstanding loan commitments aggregating $108,527,000 and $160,451,000 at December 31, 2008 and 2007, respectively. Loan commitments for variable rate loans were $83,043,000 and $110,832,000 at December 31, 2008 and 2007, respectively. Loan commitments for fixed rate loans were $25,484,000 and $49,619,000 at December 31, 2008 and 2007, respectively. The fixed rate loan commitments at December 31, 2008 have interest rates ranging from 4.50% to 8.75% and maturities ranging from one year to ten years. A distribution of outstanding loan commitments by contractual maturity is shown below (in thousands):

At December 31, 2008


	Commitment Period
	Less
	than one		1-3		3-5		Over 5
	year		years		years		years		Totals

Home equity lines of credit	$	158	$	1,058	$	5,920	$	10,461	$	17,597
Residential loan commitments		136		—		—		—		136
Standby letters of credit		2,945		27		2,000		—		4,972
Lines of credit — commercial		42,723		4,253		1,016		538		48,530
Commercial construction — residential land development and construction		10,486		3,180		115		—		13,781
Other commercial commitments		15,774		2,758		3,488		1,491		23,511


Totals	$	72,222	$	11,276	$	12,539	$	12,490	$	108,527

At December 31, 2007


	Commitment Period
	Less
	than		1 - 3		3 - 5		Over 5
	1 year		years		years		years		Totals

Home equity lines of credit	$	179	$	670	$	3,921	$	12,898	$	17,668
Residential loan commitments		3,907		—		—		—		3,907
Standby letters of credit		3,536		1,879		2,000		—		7,415
Lines of credit — commercial		64,717		3,772		807		1,165		70,461
Commercial construction — residential land development and construction		19,487		8,009		35		—		27,531
Other commercial commitments		24,431		3,988		2,837		2,213		33,469


Totals	$	116,257	$	18,318	$	9,600	$	16,276	$	160,451

Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require a payment of a fee. Since portions of the commitments are expected to expire without being drawn upon, the total commitments do not necessarily represent future cash requirements. The Corporation evaluates each customer’s credit worthiness on a case by case basis. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the customer.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE N — EMPLOYEE BENEFIT PLANS

The Bank maintains a 401(k) plan for its employees. All employees are eligible to participate in the 401(k) plan after completion of age and service requirements. An employee can be enrolled as a participant on the first “Enrollment Date” after reaching age 18 and completing six months of service.

Contributions to the plan by the Bank are discretionary and are expensed as made. The Bank matches 50% of the first 6% of employee contributions to the plan. Employer contributions vest 20% per year for five years. During 2008, 2007 and 2006, employer contributions were $243,000, $237,000 and $171,000, respectively.

NOTE O — REGULATORY CAPITAL REQUIREMENTS

The Corporation and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and, additionally for the Bank, the regulatory framework for prompt corrective action, the Corporation and Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE O — REGULATORY CAPITAL REQUIREMENTS

Quantitative measures established by regulation require the Corporation and Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). The following is a presentation of the Corporation’s and Bank’s regulatory capital ratios (in thousands):


											Minimum
						Minimum					To Be Well Capitalized
						for Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of December 31, 2008
Total capital (to risk weighted assets)
Consolidated		107,962		10.69	%		80,832		8.00	%		N/A		N/A
Bank		105,568		10.47	%		80,667		8.00	%		100,834		10.00	%
Tier 1 capital (to risk weighted assets)
Consolidated		95,310		9.43	%		40,416		4.00	%		N/A		N/A
Bank		92,941		9.22	%		40,334		4.00	%		60,501		6.00	%
Tier 1 capital (to average assets)
Consolidated		95,310		8.88	%		42,933		4.00	%		N/A		N/A
Bank		92,941		8.69	%		42,781		4.00	%		53,476		5.00	%

As of December 31, 2007
Total capital (to risk weighted assets)
Consolidated		112,984		11.57	%		78,108		8.00	%		N/A		N/A
Bank		110,486		11.34	%		77,972		8.00	%		97,465		10.00	%
Tier 1 capital (to risk weighted assets)
Consolidated		102,367		10.48	%		39,054		4.00	%		N/A		N/A
Bank		99,869		10.25	%		38,986		4.00	%		58,479		6.00	%
Tier 1 capital (to average assets)
Consolidated		102,367		10.15	%		40,334		4.00	%		N/A		N/A
Bank		99,869		9.99	%		39,989		4.00	%		49,987		5.00	%

At December 31, 2008 and 2007, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category. Federal and state banking laws and regulations place certain restrictions on the amount of dividends and loans a bank can pay to its parent company. No cash dividends have ever been paid by the Corporation.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE P — 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. No options are available for grant under this plan.

A summary of the option activity in the 1994 Plan follows:


				Weighted
				Average
	Options			Exercise
	Outstanding			Price
Outstanding at January 1, 2006		517,140		$	8.00
Exercised		(48,717	)	$	6.40

Outstanding at December 31, 2006		468,423		$	8.16
Exercised		(14,741	)	$	4.41

Outstanding at December 31, 2007		453,682		$	8.29
Forfeited		(93,284	)	$	6.88

Outstanding at December 31, 2008		360,398		$	8.65

At December 31, 2008, 2007 and 2006, 360,398, 453,682 and 468,423 options were exercisable at weighted average exercise prices of $8.65, $8.29 and $8.16 per share, respectively.

There were no options exercised during 2008. The intrinsic value of options exercised during the years ended December 31, 2007 and 2006 were approximately $206,000 and $707,000, respectively. The options outstanding at December 31, 2008 had no intrinsic value.

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, shares, 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 Corporation’s Board of Directors approved grants of stock options and restricted stock without performance criteria in 2008. The awards have a term of ten years and typically vest fully three years from the grant date.

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 based on the modified fair value 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.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE P — INCENTIVE STOCK PLANS (Continued)

The weighted average fair value of the modified options at the modification date in 2007 were $4.40 and $3.94 for the options originally granted in 2006 and 2005, respectively. The following assumptions were used to determine the modified fair value of the options granted in 2006 and 2005 at modification date in 2007:


	Modified in 2007
	Originally Granted
	2006			2005

Risk-free interest rate		4.31	%		4.23	%
Expected option life	5.5 years			4.5 years
Dividend yield		0.00	%		0.00	%
Expected volatility of stock price		26.26	%		26.79	%

During the year ended December 31, 2007, the Corporation reversed expense related to stock options of $120,000 and recognized compensation expense of $46,000 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 during the year ended December 31, 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 $26,000 for the year ended December 31, 2007.

The Corporation reversed expense related to restricted stock of $270,000 and recognized expense of $102,000 in 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 during 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 $57,000 in 2007.

Stock Options Granted — The incentive stock options were granted with the exercise price equal to market price on the day of grant. The weighted average fair value of the options granted at grant date was $1.56. The following assumptions were used to determine the fair value of the options granted in 2008:


	2008

Risk-free interest rate		2.92	%
Expected option life	7.0 years
Dividend yield		0.00	%
Expected volatility of stock price		28.39	%

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE P — INCENTIVE STOCK PLANS (Continued)

A summary of the 2005 Plan’s option activity is as follows:


				Average
				Modified
	Number			Exercise
	of Shares			Price
Outstanding at January 31, 2006		17,467		$	13.06
Shares Granted — Stock Options		17,784		$	13.06

Outstanding at December 31, 2006		35,251		$	13.06
Shares Granted — Stock Options		—		$	—

Outstanding at December 31, 2007		35,251		$	13.06
Shares Granted — Stock Options		179,144		$	4.83
Shares Forfeited — Stock Options		(8,733	)	$	13.06

Outstanding at December 31, 2008		205,662		$	5.89


Options exercisable		67,877

During the year ended December 31, 2008, the Corporation recognized compensation expense of $71,000 related to stock options. Compensation cost of $76,000 and $62,000 is expected to be recognized during 2009 and 2010, respectively.

Stock Grants — Stock awards are granted to officers. A summary of the plan’s stock award activity is as follows:


	Number
	of Shares
Outstanding at December 31, 2005		12,843
Restricted Shares Granted		12,239
Restricted Shares Forfeited		(513	)

Outstanding at December 31, 2006		24,569
Restricted Shares Forfeited		(613	)

Outstanding at December 31, 2007		23,956
Restricted Shares Forfeited		(9,592	)
Restricted Shares Transferred to Common Shares		(6,231	)
Restricted Shares Granted		43,883

Outstanding at December 31, 2008		52,016

During the year ended December 31, 2008, the Corporation recognized compensation expense of $62,000 related to restricted stock. Compensation cost of $75,000 and $62,000 is expected to be recognized during 2009 and 2010, respectively. The fair value of shares vested during 2008 was $81,000. No shares vested during 2006 or 2007.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE Q — EARNINGS PER SHARE

Factors used in the basic and diluted earnings per share calculation follow (in thousands, except share and per share data):


	2008			2007		2006
Basic
Net income (loss)		($31,925	)	$	3,166	$	7,819

Weighted average common shares		8,007,345			8,602,704		6,372,471

Basic earnings per common share		($3.99	)	$	0.37	$	1.23

Diluted
Net income (loss)		($31,925	)	$	3,166	$	7,819

Weighted average common shares outstanding for basic earnings per common share		8,007,345			8,602,704		6,372,471

Add: Dilutive effects of assumed exercise of stock options		—			224,827		299,848


Average shares and dilutive potential common shares		8,007,345			8,827,531		6,672,319


Dilutive earnings per common share		($3.99	)	$	0.36	$	1.17

All stock options and unvested shares were excluded from the computation of diluted earnings per share for 2008 because they were antidilutive. Stock options for 35,251 shares of common stock were not considered in computing diluted earnings per common share for 2006 because they were antidilutive. There were no antidilutive options in 2007. All share and per share amounts have been adjusted for stock dividends.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE R — PARENT ONLY CONDENSED FINANCIAL INFORMATION

The condensed financial information that follows presents the financial condition of the parent company, Dearborn Bancorp, Inc., along with the results of its operations and its cash flows.

CONDENSED BALANCE SHEETS


	December 31,
(In thousands)	2008		2007
ASSETS
Cash and cash equivalents	$	635	$	715
Investment in subsidiary		105,675		145,050
Other assets		1,631		1,978


Total assets	$	107,941	$	147,743


LIABILITIES AND STOCKHOLDERS’ EQUITY
Other liabilities	$	103	$	195
Subordinated debentures		10,000		10,000


Total liabilities		10,103		10,195

Stockholders’ equity		97,838		137,548


Total liabilities and stockholder’s equity	$	107,941	$	147,743

CONDENSED STATEMENTS OF INCOME


	Years Ended December 31,
(In thousands)	2008			2007			2006

Interest income	$	7		$	197		$	948
Dividends from Bank		3,500			15,000			—
Interest expense		740			872			870
Other operating expenses		1,104			1,149			921


Net income (loss) before income tax and equity in undistributed income of subsidiary		1,663			13,176			(843	)

Income tax benefit		702			665			345


Net income (loss) before equity in undistributed income of subsidiary		2,365			13,841			(498	)

Equity in undistributed income of subsidiary (dividends in excess of earnings)		(34,290	)		(10,675	)		8,317


Net income (loss)		($31,925	)	$	3,166		$	7,819

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE R — PARENT ONLY CONDENSED FINANCIAL INFORMATION (Continued)

CONDENSED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
(In thousands)	2008			2007			2006
Cash flows from operating activities
Net income (loss)		($31,925	)	$	3,166		$	7,819
Adjustments to reconcile net income to net cash provided by operating activities
(Equity in undistributed income of subsidiary) dividends in excess of earnings		34,290			10,675			(8,317	)
Other, net		181			426			81

Net cash flows from operating activities		2,546			14,267			(417	)

Cash flows from investing activities
Investment in subsidiary		—			(70,516	)		—
Purchases of securities, available for sale		—			—			(77,920	)
Proceeds from the sale of securities available for sale		—			—			77,840
Proceeds from calls, maturities and repayments of securities available for sale		—			4,077			8,700
Property and equipment acquired		—			—			—


Net cash flows from investing activities		—			(66,439	)		8,620

Cash flows from financing activities
Proceeds from exercise of stock options		—			62			292
Repurchase of common stock		(2,627	)		(10,801	)		(2,824	)
Issuance of common stock		—			—			55,131
Tax benefit of stock options exercised		—			210			98


Net cash flows from financing activities		(2,627	)		(10,529	)		52,697


Increase (decrease) in cash and cash equivalents		(81	)		(62,701	)		60,900

Cash and cash equivalents at the beginning of year		716			63,416			2,516


Cash and cash equivalents at end of year	$	635		$	715		$	63,416

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE S — QUARTERLY FINANCIAL DATA (UNAUDITED)


	Interest		Net Interest		Net			Earnings (loss) per share
(In thousands, except per share data)	Income		Income		Income (loss)			Basic			Fully diluted
2008
First quarter	$	16,299	$	8,053	$	676		$	0.08		$	0.08
Second quarter		15,125		8,284		(4,614	)		(0.57	)		(0.57	)
Third quarter		14,863		8,250		1,420			0.18			0.18
Fourth quarter		14,839		7,544		(29,407	)		(3.77	)		(3.77	)

2007
First quarter	$	17,471	$	8,649	$	1,618		$	0.18		$	0.18
Second quarter		17,573		8,595		2,005			0.23			0.22
Third quarter		17,851		8,501		(855	)		(0.10	)		(0.10	)
Fourth quarter		17,215		7,874		398			0.05			0.05

Net income for the fourth quarter of 2008 includes the impact of ($22,458,000) after tax or ($2.88) per share for the impairment of goodwill and ($3,678,000) after tax, or ($0.47) per share for the impairment of other intangible assets.

NOTE T — SIGNIFICANT ESTIMATES AND CONCENTRATIONS

Current Economic Conditions

The current economic environment presents financial institutions with unprecedented circumstances and challenges which in some cases have resulted in large declines in the fair values of investments and other assets, constraints on liquidity and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. The financial statements have been prepared using values and information currently available to the Corporation.

The Corporation is further affected by the economic conditions specific to Southeastern Michigan due to the importance of the automobile industry to the local economy. While the Corporation does not have significant exposure to automobile manufacturers and suppliers, the downturn in the automotive industry has had an adverse effect of many of the Corporation’s borrowers and the Corporation’s allowance for loan losses.

Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses and capital which could negatively impact the Corporation’s ability to meet regulatory capital requirements and maintain sufficient liquidity.

DEARBORN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

December 31, 2008, 2007 and 2006

NOTE U — RISKS AND UNCERTAINTIES

The Corporation’s allowance for loan losses contains certain assumptions on the value of collateral dependent loans as well as certain economic and industry conditions which may be subject to change within the next year. These changes could have an adverse impact on the allowance for loan losses in the near term.

NOTE V — SUBSEQUENT EVENT

In February 2009, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) voted to amend the restoration plan for the Deposit Insurance Fund (DIF). The amended restoration plan extended the period of time to raise the DIF reserve ratio to 1.15 percent from five to seven years. The amended restoration plan also includes a final rule that sets assessment rates. Under this final rule, beginning on April 1, 2009 the Company expects the FDIC premium assessed to the Company to increase.

The Board of the FDIC also adopted an interim rule imposing a 20 basis point special assessment on insured institutions as of June 30, 2009 which will be payable on September 30, 2009. The interim rule would also allow the assessment of additional special assessments of up to 10 basis points after June 30, 2009 as deemed necessary. Comments on the interim rule are due within 30 days of publication in the Federal Register.

While the Company has not fully evaluated the impact the increased assessment rates and the pending special assessment will have on the 2009 financial results, it is anticipated the impact will be material to the 2009 results of operations.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS

Company Overview and Executive Summary

Dearborn Bancorp, Inc. (the “Corporation”) 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. The Bank was renamed Fidelity Bank on April 30, 2007. 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.

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.

The Corporation completed the acquisition of Fidelity Financial Corporation of Michigan (Fidelity), a commercial bank with seven offices in Oakland County, Michigan on January 4, 2007. The acquisition significantly expanded the Bank’s presence in Oakland County, Michigan. Management believes that the acquisition has been beneficial to the Bank’s customers and the Corporation’s shareholders.

The Bank currently operates eighteen banking offices in Wayne, Macomb, Oakland and Washtenaw Counties, Michigan. A list of banking offices is shown on the following page.

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

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

The Bank’s market area consists primarily of the Metropolitan Detroit area. This is a large real estate market and the Bank’s loan portfolio accounts for less than one percent of this market. The Detroit real estate market has been negatively impacted by the unfavorable economic conditions in the State of Michigan. Despite the local economy and its impact on certain industries, many local industries and economies are prospering. The Bank has maintained 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 ($31,925,000) during 2008, compared to net income of $3,166,000 during 2007. The factors that contributed primarily to the decline in earnings during 2008 were, the impairment of goodwill and other intangible assets, various costs related to the Bank’s non-performing assets such as provision for loan losses, the write-down and loss on sale of other real estate and defaulted loan expense and the decline in the Corporation’s net interest margin.

The most significant factor in the decline in earnings during 2008 was the impairment of goodwill and other intangible assets recorded during the fourth quarter of 2008, which decreased net income by $26,100,000. This non-cash impairment expense was the result of the annual evaluation of the Corporation’s goodwill and other intangible assets.

Another significant factor in the decline in earnings during 2008 was the costs related to the Bank’s non-performing assets. The Corporation recorded provision for loan loss of $14,606,000 during 2008 compared to $5,821,000 during 2007. The provision for loan losses is determined by the internal analysis of the allowance for loan losses and the large increase during 2008 was the result of a higher level of non-performing loans and net charge-offs. Net charge-offs amounted to $10,771,000 during 2008 compared to $4,683,000 during 2007. The Corporation also recorded $3,037,000 for the write-down and loss on sale of other real estate in 2008 compared to $727,000 during 2007. The Corporation also recorded defaulted loan expense of $2,078,000 during 2008 compared to $685,000 during 2007.

Income during 2008 was also impacted by a compression in the Corporation’s net interest margin compared with 2007. This was the result of the increase in non-performing loans, the decline in short term interest rates during the fourth quarter of 2008 and competitive pricing pressure affecting loan and deposit generation.

The Bank has also formed two subsidiaries that offer additional or specialized services to the Bank’s customers. The Bank’s subsidiaries, their formation date and the type of services offered are listed below:


Date Formed	Name	Services Offered


August 1997	Community Bank Insurance Agency, Inc.	Limited insurance related activities

March 2002	Community Bank Audit Services, Inc.	Internal auditing and compliance services for financial institutions

The date opened, branch location and branch type of each branch is listed below:


Date Opened	Location	Type of office


February 1994	22290 Michigan Avenue	Full service retail branch with ATM
	Dearborn, Michigan 48123

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 Regional lending center
	Ann Arbor, MI 48103

October 2004	2180 West Stadium Blvd.	Full service retail branch with ATM
	Ann Arbor, MI 48103

December 2004	1360 Porter Street	Loan production office Regional lending center

January 2007	1040 East Maple Birmingham, MI 48009	Full service retail branch with ATM Regional lending center


January 2007	3681 West Maple	Full service retail branch with ATM
	Bloomfield Township, MI 48301

January 2007	30700 Telegraph, Suite	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	200 Galleria Office Center, Suite 141	Full service retail branch with ATM
	Southfield, MI 48134

April 2007	7755 23 Mile Road	Full service retail branch with ATM
	Shelby Township, Mi 48316

Forward-Looking Statements

The following discussion 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.

Critical Accounting Policies and Estimates

The “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as disclosures found elsewhere in the annual report, are based upon the consolidated financial statements of Dearborn Bancorp, Inc., which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires Dearborn Bancorp, Inc. to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses. Actual results could differ from those estimates.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses in the loan portfolio. Management’s evaluation of the adequacy of the allowance for loan losses is an estimate based primarily on reviews of individual loans, assessments of the impact of current economic conditions on the portfolio, and historical loss experience. See Note D of the Notes to Consolidated Financial Statements and the discussion of “Allowance for Loan Losses” in the Management’s Discussion and Analysis.

Management believes the accounting estimates related to the allowance for loan losses is a “critical accounting estimate” because:

	1)		The estimates are highly susceptible to change from period to period and require management to make judgements concerning the quality of the loan portfolio and the impact of current economic conditions on borrowers’ ability to repay their loans.

	2)		The impact of recognizing an impairment or loan loss could have a material effect on the financial statements of Dearborn Bancorp, Inc.

Management has discussed the development and selection of these critical accounting estimates with the audit committee of the board of directors and the audit committee has reviewed the Corporation’s disclosures related to them in this Management’s Discussion and Analysis.

Critical Accounting Policies and Estimates (continued)

Goodwill

The valuation of goodwill has been analyzed by management on a periodic basis and analyzed by an independent consultant at least annually. In this process, estimates and judgment are utilized in the projection of future earnings and in the weighting of the components of the valuation of the Bank. Management believes that the accounting estimates used in determining future earnings is a critical accounting estimate because these estimates are based on various factors that are difficult to predict including future economic conditions, the demand for loans and deposits in our markets and fluctuation of interest rates. Judgment is also utilized in the application of factors to the various methods used in determining the value of the reporting unit. The development and assignment of these factors have a significant impact on the final valuation of the reporting unit.

Deferred Tax Asset

The increase in the deferred tax asset is the result of the impairment charge on goodwill and other intangibles assets that was recorded during 2008. In order to record this deferred tax asset, the Corporation must be able to utilize this asset with five years. Management has projected that the Corporation will have sufficient pre-tax earnings during the next five years. This projection utilized various estimates that will impact the Corporation’s earnings during this period. Management believes that the accounting estimates used in determining future earnings is a critical accounting estimate because these estimates are based on various factors that are difficult to predict including future economic conditions, the demand for loans and deposits in our markets and fluctuation of interest rates.

Results of Operations

2008 Compared to 2007.The Corporation reported a net loss of ($31,925,000) in 2008 compared to net income of $3,166,000 in 2007, a decrease of $35,091,000. The Corporation’s decline in net income was primarily due to a non cash impairment charge for the impairment of goodwill and other intangible assets. If the after-tax impact of this impairment charge is excluded, the Corporation’s net loss would be ($5,788,000), compared to net income of $3,166,000 in 2007, a decrease of $8,954,000 or 283%. The decrease in net income excluding the impairment charge is primarily due to the costs related to the Bank’s non-performing assets. The Corporation recorded provision for loan losses of $14,606,000 during 2008 compared to $5,821,000 during 2007. The provision for loan losses is determined by the internal analysis of the allowance for loan losses and the large increase during 2008 was the result of a higher level of non-performing loans and net charge-offs. Net charge-offs amounted to $10,771,000 during 2008 compared to $4,683,000 during 2007. The Corporation also recorded $3,037,000 for the write-down and loss on sale of other real estate in 2008 compared to $727,000 during 2007. The Corporation also recorded defaulted loan expense of $2,078,000 during 2008 compared to $685,000 during 2007.

2007 Compared to 2006.The Corporation reported net income of $3,166,000 in 2007 compared to $7,819,000 in 2006, a decrease of $4,653,000 or 60%. The Corporation’s decline in net income was primarily due to an increase in provision for loan losses and defaulted loan expense and the write-down of real estate owned. The Corporation’s net interest margin also decreased due to increasing deposit costs and an increase in non-performing loans..

Net Interest Income

2008 Compared to 2007.Net interest income in 2008 was $32,131,000 compared to $33,619,000 in 2007, a decrease of $1,488,000 or 4%. The decrease in net interest income was primarily due to the decline in interest rates during 2008 and the volume of assets and liabilities affected by the decline in rates. As the Corporation has interest sensitive assets and liabilities of $975,337,000 and $834,731,000, respectively, the decline in interest rates causes a decrease in net interest income. The Corporation’s net interest rate spread increased to 2.80% in 2008 from 2.73% in 2007, an increase of 7 basis points. However, the Corporation’s net interest margin decreased to 3.29% in 2008 from 3.48% in 2007, a decrease of 19 basis points. The increase in the net interest rate spread was due to the decline in interest rates on the Corporation’s interest-bearing assets and interest-bearing liabilities.

Average interest earning assets grew by $9.6 million between the periods while interest bearing liabilities grew by $28.3 million. While management is continually reviewing spreads and margins, future increases in the net interest margin are primarily expected from the diversification of the Bank’s deposit structure. Management expects to decrease time deposits as a percentage of deposits.

2007 Compared to 2006.Net interest income for the year ended December 31, 2007 was $33,619,000 compared to $28,002,000 for the year ended December 31, 2006, an increase of $5,617,000 or 20%. The increase in net interest income was primarily due to the acquisition of Fidelity. The Corporation’s net interest rate spread decreased to 2.73% in 2007 from 3.08% in 2006, a decrease of 34 basis points. The decrease in the net interest rate spread was due to liability costs increasing faster than asset yields. The Corporation’s net interest margin decreased to 3.48% in 2007 from 3.80% in 2006. The decrease in the net interest spread and net interest margin was due to increasing liability costs and decreasing asset yields. The decrease in asset yields was primarily due to the increase in non-performing loans.

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.

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


	Year Ended December 31, 2008							Year Ended December 31, 2007
	Average				Average			Average				Average
(In thousands)	Balance		Interest		Rate			Balance		Interest		Rate

Assets
Interest-bearing deposits with banks	$	6,591	$	43		0.65	%	$	2,795	$	127		4.54	%
Federal funds sold		8,316		86		1.04	%		7,964		433		5.44	%
Investment securities, available for sale		15,681		464		2.97	%		10,772		603		5.60	%
Loans		944,749		60,533		6.42	%		944,225		68,947		7.30	%

Sub-total earning assets		975,337		61,126		6.27	%		965,756		70,110		7.26	%
Other assets		81,377							83,691


Total assets	$	1,056,714						$	1,049,447


Liabilities and stockholders’ equity
Interest bearing deposits	$	740,520	$	25,106		3.40	%	$	749,894	$	33,303		4.44	%
Other borrowings		94,211		3,889		4.13	%		56,526		3,188		5.64	%

Sub-total interest bearing liabilities		834,731		28,995		3.47	%		806,420		36,491		4.53	%
Non-interest bearing deposits		83,065							95,036
Other liabilities		3,152							4,736
Stockholders’ equity		135,766							143,255


Total liabilities and stockholders’ equity	$	1,056,714						$	1,049,447


Net interest income			$	32,131						$	33,619


Net interest rate spread						2.80	%						2.73	%


Net interest margin on earning assets						3.29	%						3.48	%


Tax equivalent adjustment				—							—


Tax equivalent net interest income			$	32,131						$	33,619

(continued)


	Year Ended December 31, 2006
	Average					Average
(In thousands)	Balance		Interest			Rate

Assets
Interest-bearing deposits with banks	$	3,333	$	158			4.74	%
Federal funds sold		11,682		573			4.90	%
Investment securities, available for sale		19,555		893			4.57	%
Loans		703,590		52,321			7.44	%

Sub-total earning assets		738,160		53,945			7.31	%
Other assets		28,876


Total assets	$	767,036


Liabilities and stockholders’ equity
Interest bearing deposits	$	568,095	$	23,447			4.13	%
Other borrowings		43,694		2,437			5.58	%

Sub-total interest bearing liabilities		611,789		25,884			4.23	%
Non-interest bearing deposits		57,647
Other liabilities		2,224
Stockholders’ equity		95,376


Total liabilities and stockholders’ equity	$	767,036


Net interest income			$	28,061


Net interest rate spread							3.08	%


Net interest margin on earning assets							3.80	%


Tax equivalent adjustment				(59	)


Tax equivalent net interest income			$	28,002

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.


	2008/2007									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	$	25			($109	)		($84	)		($16	)	$	63	$	47
Federal funds sold		3			(350	)		(347	)		191			140		331
Investment securities, available for sale		144			(283	)		(139	)		(5	)		300		295
Loans		(132	)		(8,282	)		(8,414	)		5,361			4,056		9,417

Total earning assets	$	40			($9,024	)		($8,984	)	$	5,531		$	4,559	$	10,090


Liabilities
Interest bearing deposits		($387	)		($7,810	)		($8,197	)	$	2,553		$	6,467	$	9,020
Other borrowings		1,556			(855	)		701			119			342		461

Total interest bearing liabilities	$	1,169			($8,665	)		($7,496	)	$	2,672		$	6,809	$	9,481


Net interest income								($1,488	)						$	609


Net interest rate spread								0.07	%							(0.55	%)


Net interest margin on earning assets								(0.19	%)							(0.34	%)

Provision for Loan Losses

2008 Compared to 2007.The provision for loan losses was $14,606,000 in 2008, compared to $5,821,000 in 2007, an increase of $8,785,000 or 151%. The increase in provision during 2008 was due primarily to the increase in non-accrual loans and net charge-offs during the period as a result of the downturn in economic activity that began in 2007 and has continued into 2008. This downturn in economic activity has continued to worsen the condition of the residential real estate market during 2008 as well as to significantly impact the Bank’s commercial and commercial real estate mortgage portfolios. Non-accrual loans increased to $51,708,000 at December 31, 2008 from $18,117,000 at December 31, 2007. During 2008, the Bank recorded net charge-offs of $10,771,000 compared to $4,683,000 during 2007. The poor economic conditions in Southeastern Michigan that began in 2007 and have intensified during 2008 have significantly impacted our commercial, commercial real estate mortgage and land development portfolios. At the time of origination, these land development 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.

The fair value of loans specifically reviewed by management and determined to be impaired increased to $41,907,000 at December 31, 2008 from $9,937,000 at December 31, 2007. The allocated allowance of loans specifically reviewed by management and determined to be impaired increased to $5,273,000 at December 31, 2008 from $879,000 at December 31, 2007. Decreases in the fair value of impaired loans are reflected in the provision for loan loss and are primarily due to declines in the value of the underlying collateral.

The provision for loan losses is based upon management’s assessment of relevant factors, including types and amounts of non-performing loans, historical loss experience on such types of loans, the relevant change in the size and mix of the loan portfolio and the impact of current economic conditions on borrowers’ ability to repay their loans.

2007 Compared to 2006.The provision for loan losses was $5,821,000 in 2007, compared to $943,000 in 2006, an increase of $4,878,000 or 517%. 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. Non-accrual loans increased to $18,117,000 at December 31, 2007 from $5,560,000 at December 31, 2006. During 2007, the Bank recorded net charge-offs of $4,683,000 compared to net recoveries of $24,000 during 2006. 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

2008 Compared to 2007.Non-interest income was ($930,000) in 2008, compared to $1,020,000 in 2007, a decrease of $1,950,000 or 191%. The increase was primarily due to the increase in the write-down and loss on sale of real estate owned. During 2008, the Corporation recorded write-downs to eleven properties in the amount of $2,292,000. The Corporation recorded a net loss of $745,000 on the sale of fifteen properties during 2008. Service charges and other fees to customers were $1,760,000 in 2008 compared to $1,408,000 in 2007, an increase of $352,000 or 25%.

2007 Compared to 2006.Non-interest income was $1,020,000 in 2007, compared to $925,000 in 2006, an increase of $95,000 or 10%. The increase was primarily due to the increase in service charges and fees to customers as a result of the acquisition of Fidelity. Service charges and other fees to customers were $1,408,000 in 2007 compared to $747,000 in 2006, an increase of $661,000 or 88%. This increase was substantially offset by the write-down of real estate owned. During 2007, the Bank wrote down the value of an industrial building and a development with 11 residential building lots by $701,000.

Non-Interest Expense

2008 Compared to 2007.Non-interest expense was $65,007,000 in 2008 compared to $23,796,000 in 2007, an increase of $41,211,000 or 173%. The increase in non-interest expense was primarily due to the impairment of goodwill and other intangible assets. This non-cash expense was due to the evaluation of the Bank’s goodwill and intangible assets as of December 31, 2008. This valuation determined that the Bank’s goodwill and intangible assets were impaired by $34,028,000 and $5,573,000, respectively.

When the non-cash impairment charge is excluded, non-interest expense was $25,406,000 compared to $23,796,000 in 2007, an increase of $1,610,000 or 7%. This increase during 2008 is primarily due to the increase in defaulted loan expense, which is primarily comprised of real estate taxes, legal expense, insurance expense and maintenance expense related to real estate owned and non-performing loans. Defaulted loan expense for 2008 was $2,078,000 compared to $685,000 during 2007, an increase of $1,393,000 or 204%.

The largest component of the increase in non-interest expense was salaries and employee benefits which amounted to $13,142,000 in 2008 compared to $13,109,000 in 2007, an increase of $33,000. As of December 31, 2008, the number of full time equivalent employees was 205 compared to 210 as of December 31, 2007. The second largest component of the increase in non-interest expense was occupancy and equipment expense which amounted to $3,752,000 in 2008 compared to $3,663,000 in 2007, an increase of $89,000 or 2%.

2007 Compared to 2006.Non-interest expense was $23,796,000 in 2007 compared to $16,225,000 in 2006, an increase of $7,571,000 or 47%. The increase in non-interest expense was primarily due to the acquisition of Fidelity. The largest component of the increase in non-interest expense was salaries and employee benefits which amounted to $13,109,000 in 2007 compared to $10,288,000 in 2006, an increase of $2,821,000 or 27%. As of December 31, 2007, the number of full time equivalent employees was 210 compared to 157 as of December 31, 2006. The second largest component of the increase in non-interest expense was occupancy and equipment expense which amounted to $3,663,000 in 2007 compared to $2,420,000 in 2006, an increase of $1,243,000 or 51%. The increase in occupancy and equipment expense is the result of the addition of six branch offices from the acquisition of Fidelity and the opening of a branch office in Shelby Township, Michigan.

Income Tax Provision

2008 Compared to 2007.Income tax expense (benefit) was ($16,487,000) in 2008 compared to $1,856,000 in 2007, a decrease of $18,343,000. The decrease was primarily due to the decrease in income before federal income tax. Refer to Note L of the Notes to Consolidated Financial Statements for additional information.

2007 Compared to 2006.Income tax expense was $1,856,000 in 2007 compared to $3,940,000 in 2006, a decrease of $2,084,000 or 53%. The decrease was primarily due to the decrease in income before federal income tax and the expiration of a loss carry forward. The effective tax rate increased to 37% in 2007 from 33.5% in 2006 due primarily to the expiration of a loss carryforward. Refer to Note L of the Notes to Consolidated Financial Statements for additional information.

Comparison of Financial Condition at December 31, 2008 and December 31, 2007

Assets.Total assets at December 31, 2008 were $1,121,918,000 compared to $1,046,981,000 at December 31, 2007, an increase of $74,937,000 or 7%. The increase was primarily due to an increase in funds from deposits and other assets, partially offset by decreases in loans, goodwill and other intangible assets. The increase in other assets and the decrease in goodwill and other intangible assets are related to the impairment charge on goodwill and other intangible assets and the related increase in deferred tax assets.

Securities Available for Sale.Total securities available for sale, at December 31, 2008 were $84,148,000 compared to $8,902,000 at December 31, 2007, an increase of $75,246,000 or 845%. The increase was primarily due to funds received from deposits which were deployed into short-term investments. The Bank’s portfolio of securities available for sale has an amortized cost and a fair value of $84.1 million. The securities at December 31, 2008 are as follows (in thousands):


	December 31, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

US Government sponsored entity securities	$	21,175	$	226		($2	)	$	21,399
Corporate bonds		13,185		54		(4	)		13,235
Municipal securities		1,303		28		—			1,331
Mortgage backed securities		179		4		—			183
Money market mutual funds		48,000		—		—			48,000


Totals	$	83,842	$	312		($6	)	$	84,148

A maturity and repricing schedule of the securities portfolio at December 31, 2008 is listed below (in thousands):


	Less than one year					One to five years					Over five years
			Weighted					Weighted					Weighted
			Average					Average					Average
	Amount		Yield			Amount		Yield			Amount		Yield			Total

US Government sponsored entity securities	$	4,971		2.17	%	$	16,428		2.38	%	$	—		—	%	$	21,399
Corporate bonds		—		—	%		13,235		1.85	%		—		—	%		13,235
Municipal securities		118		4.51	%		929		3.68	%		284		3.05	%		1,331
Mortgage backed securities		—		—	%		183		5.93	%		—		—	%		183
Money market mutual funds		48,000		0.52	%		—		—	%		—		—	%		48,000


Totals	$	53,089				$	30,775				$	284				$	84,148

The entire portfolio has a net unrealized gain of $306,000. The unrealized gain is reflected by an adjustment to stockholders’ equity. The Corporation does not hold any securities in the “Held to Maturity” category nor does the Corporation hold or utilize derivatives.

Loans.Total loans at December 31, 2008 were $933,269,000 compared to $952,084,000 at December 31, 2007, a increase of $18,815,000 or 2%. The components of the outstanding balances for the years ended December 31, are as follows (in thousands):


	2008		2007		2006		2005		2004

Consumer loans	$	31,864	$	35,833	$	32,282	$	35,041	$	42,149
Commercial, financial, & other		164,740		174,958		124,523		106,900		115,651
Land development loans — residential		54,323		63,639		65,460		58,943		26,198
Land development loans — non residential		16,094		10,156		14,633		—		—
Commercial construction loans — residential		17,296		33,768		30,988		37,806		28,269
Commercial construction loans — non residential		25,322		40,187		38,662		47,384		29,176
Commercial real estate mortgages		571,204		539,306		401,924		323,666		296,934
Residential real estate mortgages		52,426		54,237		47,948		47,297		49,185


	$	933,269	$	952,084	$	756,420	$	657,037	$	587,562

The decrease in loans during 2008 was primarily due to net charge-offs of $10,771,000 and declining loan demand.

The Bank expects the percentage of total commercial loans to increase as a percentage of the loan portfolio in 2009. These types of loans carry a relatively large average balance, produce more cross-selling opportunities and are typically well secured by real estate. The Bank believes that the higher level of risk that is also inherent with these types of loans is offset by the Bank’s high standards for credit quality and well-seasoned group of commercial lenders.

A maturity and repricing schedule of the loan portfolio, which distributes fixed rate loans by maturity date and adjustable rate loans by repricing date at December 31, 2008 is listed below (in thousands):


	Within		Three to		One to		After
	Three		Twelve		Five		Five
	Months		Months		Years		Years		Total

Consumer loans	$	21,186	$	466	$	9,080	$	47	$	30,779
Commercial, financial & other		77,846		9,032		68,433		4,116		159,427
Land development loans — residential		29,709		4,403		6,775		—		40,887
Land development loans - non-residential		9,048		1,314		1,664		—		12,026
Construction loans — residential		12,256		268		—		—		12,524
Construction loans — non-residential		22,795		—		911		—		23,706
Commercial real estate mortgages		51,341		49,886		418,901		30,565		550,693
Residential real estate mortgages		921		16,095		24,041		10,462		51,519


	$	225,102	$	81,464	$	529,805	$	45,190		881,561

Non-accrual loans										51,708

Total loans									$	933,269


Loan at fixed interest rates	$	56,238	$	65,109	$	504,490	$	44,501	$	670,338
Loan at variable interest rates		168,864		16,355		25,315		689		211,223


	$	225,102	$	81,464	$	529,805	$	45,190		881,561


Non-accrual loans										51,708

Total loans									$	933,269

Variable rate loans comprise 23% of the loan portfolio. The interest rates of these loans change or reprice at specific intervals according to certain market indices. The remainder of the loan portfolio has a fixed interest rate until maturity.

The Bank automatically places any loan that has been partially charged-off and most consumer loan borrowers in bankruptcy proceedings on non-accrual. The Bank on a discretionary basis places loans on non-accrual when a borrower is in bankruptcy where adequate security cannot be demonstrated and the borrower ceases paying interest. All other loans are typically placed on non-accrual after the borrower is ninety days or more past due unless collection is expected within 60 days. Refer to Note D of the Notes to the Consolidated Financial Statements for additional information.

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


	2008		2007		2006

Troubled debt restructuring	$	17,765	$	—	$	—
Over 90 days past due and still accruing		450		884		2,101
Non-accrual loans		51,708		18,117		5,560

Total non performing loans	$	69,923	$	19,001	$	7,661

Non-performing loans included troubled debt restructuring of $17,765,000 at December 31, 2008. These loans were qualified as troubled debt restructuring due to changes from principal and interest payments to interest only payments, restructuring of collateral, or renewals of interest reserves when current loan to value ratios were outside of our normal loan policy. In all cases, no additional valuation allowances were recorded against the loans since all of the modifications related to terms other than interest rates or principal balances. All of these loans are current according to their renegotiated terms.

Non-accrual loans at December 31, 2008 were $51,708,000. The increase in non-accrual loans during the year ended December 31, 2008 is primarily due to the downgrading of 109 loans with a balance of $46,110,000 to non-accrual status. An impairment analysis was completed on these loans resulting in a specific allocation of the allowance for loan losses to these loans of $4,545,000 at December 31, 2008. Charge-offs in the amount of $6,277,000 were recorded on these loans by the Corporation during 2008. We continue to work to collect these loans as they are all secured by real estate which we believe will have significant value, even in liquidation. The distribution of loans downgraded to non-accrual status during 2008 (dollars, in thousands) is as follows:


	Number of
	Loans		Balance

Consumer Loans		9	$	953
Commercial Loans		39		5,085
Land Development — Residential		7		9,844
Land Development — Non Residential		2		4,068
Commercial Construction Loans — Residential		7		3,707
Commercial Construction Loans — Non Residential		1		1,615
Commercial Mortgage Loans		35		20,370
Residential Mortgages Loans		9		468


Totals		109	$	46,110

The increase in non-performing loans is primarily related to the Bank’s commercial and commercial real estate loans as well as loans financing the development and construction of residential property. The decline of general economic conditions in Southeastern Michigan which began in 2007 and has continued throughout 2008 has negatively impacted many or the Bank’s commercial borrowers. 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 land development and construction 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 adverse 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 December 31, 2008:


	Number of
	Loans		Balance

Consumer Loans		11	$	1,085
Commercial Loans		41		5,313
Land Development — Residential		11		13,436
Land Development — Non Residential		2		4,068
Commercial Construction Loans — Residential		8		4,772
Commercial Construction Loans — Non Residential		1		1,616
Commercial Mortgage Loans		37		20,511
Residential Mortgages Loans		13		907


Totals		124	$	51,708

Allowance for Loan Losses.The allowance for loan losses at December 31, 2008 was $14,452,000 compared to $10,617,000 at December 31, 2007, an increase of $3,835,000 or 36%. The large increase in provision for loan losses during 2008 was primarily the result of net charge-offs and more problem loans during the year. Net charge-offs amounted to $10,771,000 during 2008. These charge-offs are primarily related to the Bank’s commercial and commercial real estate loans as well as loans financing the development and construction of residential property. The decline of general economic conditions in Southeastern Michigan which began in 2007 and has continued throughout 2008 has negatively impacted many or the Bank’s commercial borrowers. 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 land development and construction loans. 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. Transactions in the allowance for loan losses for the years ended December 31, are as follows (in thousands):


	2008			2007			2006			2005			2004

Balance, beginning of year	$	10,617		$	7,775		$	6,808		$	5,884		$	4,314

Allowance on loans acquired		—		$	1,704			—			—			184

Charge-offs:
Consumer loans		318			226			24			112			31
Commercial, financial & other		4,304			914			139			169			—
Commercial construction loans — residential		1,635			1,291			—			—			—
Commercial construction loans — non-residential		192			—			—			—			—
Land development loans — residential		1,777			1,665			—			—			—
Commercial real estate mortgages		2,446			662			36			86			—
Residential loans		296			320			38			—			100

Recoveries:
Consumer loans		19			25			17			37			12
Commercial, financial & other		117			224			218			131			44
Commercial construction loans — non-residential		3			6			—			—			—
Land development loans — residential		33			—			—			—			—
Commercial real estate mortgages		21			140			26			10			61
Residential loans		4			—			—			32			—


Net charge-offs		10,771			4,683			(24	)		157			14

Additions charged to operations		14,606			5,821			943			1,081			1,400


Balance at end of period	$	14,452		$	10,617		$	7,775		$	6,808		$	5,884


Allowance to total loans		1.55	%		1.12	%		1.03	%		1.04	%		1.00	%


Net Charge-offs to average loans		1.14	%		0.50	%		0.00	%		0.02	%		0.00	%

The increase in the allowance for loan losses was based upon management’s assessment of relevant factors, including types and amounts of non-performing loans, historical loss experience for the Bank and for other banks in the peer group on such types of loans, the relevant change in the size and mix of the Bank’s loan portfolio and expected impact of current economic conditions on borrowers’ ability to repay their loans.

The allocation of the allowance for loan losses as of December 31, 2008 is as follows (in thousands):

		��
	Total
	2008		2007		2006		2005		2004

Consumer loans	$	141	$	453	$	470	$	512	$	551
Commercial, financial, & other		1,298		1,404		1,462		1,527		1,498
Land development loans — residential		4,496		2,215		1,228		566		347
Land development loans — non-residential		2,086		117		146		—		—
Commercial construction loans — residential		1,739		714		366		311		402
Commercial construction loans — non-residential		1,151		553		434		517		382
Commercial real estate mortgages		3,391		4,671		3,270		3,065		2,302
Residential real estate mortgages		150		490		398		310		402

	$	14,452	$	10,617	$	7,775	$	6,808	$	5,884


	Percent of allowance for loan losses in each category
	to total allowance for loan losses
	2008			2007			2006			2005			2004

Consumer loans		0.98	%		4.27	%		6.05	%		7.52	%		9.36	%
Commercial, financial, & other		8.98	%		13.22	%		18.80	%		22.43	%		25.46	%
Land development loans — residential		31.11	%		20.86	%		15.80	%		8.31	%		5.90	%
Land development loans — non-residential		14.43	%		1.10	%		1.88	%		0.00	%		0.00	%
Commercial construction loans — residential		12.03	%		6.73	%		4.71	%		4.57	%		6.83	%
Commercial construction loans — non-residential		7.96	%		5.21	%		5.58	%		7.59	%		6.49	%
Commercial real estate mortgages		23.46	%		44.00	%		42.06	%		45.02	%		39.12	%
Residential real estate mortgages		1.04	%		4.62	%		5.12	%		4.55	%		6.83	%

		100.00	%		100.00	%		100.00	%		100.00	%		100.00	%


	Percent of loans in each category to total loans
	2008			2007			2006			2005			2004

Consumer loans		3.41	%		3.76	%		4.27	%		5.33	%		7.17	%
Commercial, financial, & other		17.65	%		18.38	%		16.46	%		16.27	%		19.68	%
Land development loans — residential		5.82	%		6.68	%		8.65	%		8.97	%		4.46	%
Land development loans — non-residential		1.72	%		1.07	%		1.93	%		0.00	%		0.00	%
Commercial construction loans — residential		1.85	%		3.55	%		4.10	%		5.75	%		4.81	%
Commercial construction loans — non-residential		2.71	%		4.22	%		5.11	%		7.21	%		4.97	%
Commercial real estate mortgages		61.20	%		56.64	%		53.14	%		49.26	%		50.54	%
Residential real estate mortgages		5.62	%		5.70	%		6.34	%		7.20	%		8.37	%

		100.00	%		100.00	%		100.00	%		100.00	%		100.00	%

The increase in the allocation of the allowance for loan losses to land development loans-residential and commercial construction loans-residential at December 31, 2008 compared to December 31, 2007 and 2006 is primarily due to our impairment evaluation of the non-accrual loans discussed earlier.

Premises and Equipment.Premises and equipment at December 31, 2008 were $21,272,000 compared to $22,782,000 at December 31, 2007, a decrease of $1,510,000 or 7%. The decrease was primarily due to the transfer of an office building to other assets as it is currently not being utilized by the Bank and is currently being marketed for sale.

Real Estate Owned.Real estate owned at December 31, 2008 was $9,657,000, compared to $6,319,000 at December 31, 2007, an increase of $3,338,000 or 53%. Real estate owned at December 31, 2008 is comprised of thirty-six properties with an aggregate appraised value of $12,753,000. The Bank expects real estate owned to increase during 2009 based on the increase in non-accrual loans during 2008. During 2008, the Corporation recorded loss on the sale of real estate of $745,000 and write-downs in the value of real estate in the amount of $2,292,000 to address the decline in property values after the Bank took ownership of real estate.

Goodwill and Other Intangible Assets.Goodwill and other intangible assets were $4,592,000 at December 31, 2008, compared to $45,161,000 at December 31, 2007, an decrease of $40,569,000 or 90%. The decrease was due to the impairment of goodwill and other intangible assets. The Bank has intangible assets for the estimated value of core deposit accounts and borrower relationships acquired in the acquisition of Fidelity Bank and the Bank of Washtenaw. Both of these acquisitions were consolidated into the Bank along with the goodwill and other intangible assets. The intangible values represent the present value of the net revenue streams attributable to these intangibles. These intangible assets were analyzed and re-valued as December 31, 2008. The Corporation recorded impairment expense related to the core deposit intangible in the amount of $2,991,000. The core deposit intangible was valued at $2,757,000 and is being amortized over a period of eleven years. The Corporation recorded impairment expense related to the borrower relationship intangible in the amount of $1,570,000. The borrower relationship intangible was valued to $1,835,000 and is being amortized over a period of ten years. The impairment to the core deposit intangibles was primarily due to the erosion of core deposits at a faster rate than anticipated and the transfer of core deposits to time deposits. The impairment of the customer relationship intangible is primarily due to the migration of loans at a more rapid rate than expected and the impact of current economic conditions on the loan portfolio.


	Gross
	Carrying		Accumulated
	Amount		Amortization
Core deposit intangible from acquisition of:
Bank of Washtenaw	$	264	$	—
Fidelity Financial Corporation of Michigan		2,493		—

Total core deposit intangible	$	2,757	$	—


Borrower relationship intangible from acquisition of:
Bank of Washtenaw	$	318	$	—
Fidelity Financial Corporation of Michigan		1,517		—

Total borrower relationship intangible	$	1,835	$	—


Total intangible assets	$	4,592	$	—

The step one impairment test indicated that the fair value of Fidelity Bank was well below the carrying amount as of December 31, 2008. Management then performed its own internal step two impairment testing by allocating the calculated fair value of the Bank to all of the assets and liabilities of the reporting unit to determine the implied fair value of the Bank. The implied fair value of the Bank was then compared to the actual carrying amount of goodwill. From this testing, management determined the carrying amount of goodwill exceeded in its entirety the implied fair value of goodwill. As a result, the Corporation recorded goodwill impairment expense of $34,028,000 as of December 31, 2008.

The stock price of the comparable financial institutions and the equity values of the companies that have been recently sold have been negatively impacted by the current economic environment.

Accrued Interest Receivable.Accrued interest receivable at December 31, 2008 was $3,499,000 compared to $3,816,000 at December 31, 2007, a decrease of $317,000 or 8%. The decrease was primarily due to the decline in interest rates during 2008.

Other Assets. Other assets at December 31, 2008 were $21,483,000 compared to $5,664,000 at December 31, 2007, an increase of $15,819,000 or 279%. The increase was largely due to an increase in the Corporation’s deferred tax asset as a result of the impairment of goodwill and other intangible assets.

Deposits.Total deposits at December 31, 2008 were $938,395,000 compared to $822,627,000 at December 31, 2007, an increase of $115,768,000 or 14%. The components of the outstanding balances and percentage increase in deposits from 2006 to 2007 are as follows (in thousands):


	December 31, 2008					December 31, 2007					Percent
	Balance		Percent			Balance		Percent			Increase/(Decrease)

Non-interest bearing:
Demand	$	81,317		8.67	%	$	83,594		10.16	%		(2.72	%)


Interest bearing:
Checking	$	103,774		11.06	%	$	65,196		7.93	%		59.17	%
Money market		163,611		17.44	%		106,145		12.90	%		54.14	%
Savings		54,164		5.77	%		29,814		3.62	%		81.67	%
Time, under $100,000		211,109		22.50	%		193,852		23.56	%		8.90	%
Time, $100,000 and over		324,420		34.57	%		344,026		41.82	%		(5.70	%)

		857,078		91.33	%		739,033		89.84	%		15.97	%


	$	938,395		100.00	%	$	822,627		100.00	%		14.07	%

The increase in deposits was primarily due to the introduction of a premium checking product, continued growth in two other core deposit products, several time deposit account promotions and the Bank’s participation in a wholesale money market program. As a result of deposit activity during 2008, the Bank increased demand, money market and savings accounts as a percentage of total deposits. The Bank completed an annual customer appreciation promotion in April 2008. Management developed these campaigns to increase liquidity and name awareness.

The Bank’s primary source of funds are retail deposits. The Bank also utilizes public funds in the form of time deposits, $100,000 and over and brokered deposits as sources of funds. In order to coordinate and manage these efforts, the Bank has also designated a public funds officer. Public funds at December 31, 2008 were $44.2 million compared to $111.4 million at December 31, 2007. There were 33 and 36 entities with public funds on deposit at December 31, 2008 and 2007, respectively. The average term of time deposits invested with the Bank by public units was 129 and 138 days at December 31, 2008 and 2007, respectively. Brokered deposits were $97.1 million with an average rate of 3.48% at December 31, 2008, compared to $32.8 million with an average rate of 4.89% at December 31, 2007.

Final maturities of total time deposits are as follows (in thousands):


	$100,000 and over		Less than $100,000		Total

2009	$	242,882	$	111,284	$	354,166
2010		72,969		92,541		165,510
2011		7,856		6,627		14,483
2012		612		330		942
2013		101		327		428


Totals	$	324,420	$	211,109	$	535,529

The following is a summary of the distribution and weighted average interest rate of deposits at December 31, 2008 and 2007 (in thousands):


	2008					2007
			Weighted					Weighted
			Average					Average
	Amount		Rate			Amount		Rate

Non-interest bearing:
Demand	$	81,317		—		$	83,594		—


Interest bearing:
Checking	$	103,774		1.75	%	$	65,196		1.01	%
Money market		163,611		2.19	%		106,145		2.43	%
Savings		54,164		2.06	%		29,814		1.90	%
Time, under $100,000		211,109		3.81	%		193,852		4.95	%
Time, $100,000 and over		324,420		3.64	%		344,026		4.89	%

		857,078					739,033


	$	938,395				$	822,627

The Bank continues a strategy of shifting maturing time deposits into other savings products.

Federal Funds Purchased. Federal funds purchased were $0 at December 31, 2008 compared to $30,100,000 at December 31, 2007. Federal funds purchased are utilized as a short term funding source for the Bank.

Federal Home Loan Bank Advances. Federal Home Loan Bank advances at December 31, 2008 were $65,019,000 compared to $41,370,000 at December 31, 2007, an increase of $23,649,000 or 57%. Additional advances from the Federal Home Loan Bank were utilized during 2008 in order to decrease the Bank’s cost of funds. Management expects the amount of advances to decrease in 2009.

In 1999, the Bank joined the Federal Home Loan Bank of Indianapolis. Membership in the Federal Home Loan Bank provides the Bank with a stable source of additional funding at a reasonable cost. Federal Home Loan Bank advances are collateralized with a blanket collateral agreement with the Federal Home Loan Bank and investment securities, available for sale. Please refer to Note J of the Notes to the Consolidated Financial Statements for additional information.

Other Borrowings.Other borrowings were $2,461,000 at December 31, 2008 compared to $480,000 at December 31, 2007, an increase of $1,981,000 or 413%. These borrowings are comprised of several repurchase agreements that are secured by securities held by the Bank.

Accrued Interest Payable. Accrued interest payable at December 31, 2008 was $1,695,000 compared to $3,168,000 at December 31, 2007, a decrease of $1,473,000 or 46%. The decrease was primarily due to the decline in interest rates paid on deposits..

Other Liabilities.Other liabilities were $1,037,000 at December 31, 2008 compared to $1,688,000 at December 31, 2007, a decrease of $651,000 or 39%. The increase was primarily due to an increase in accrued expenses.

Subordinated Debentures.On December 19, 2002, the Corporation issued $10,000,000 of floating rate obligated mandatory redeemable securities through a special purpose entity as part of a pooled offering. The securities have a term of thirty years. The Corporation may redeem the securities after five years at face value. They are considered to be Tier 1 capital for regulatory capital purposes. Please refer to Note K of the Notes to the Consolidated Financial Statements for additional information.

Capital

Stockholders’ equity at December 31, 2008 was $103,311,000 compared to $137,548,000 as of December 31, 2007, a decrease of $34,237,000 or 25%. The decrease was primarily due the net loss during 2008 in addition to the repurchase of outstanding common shares under a stock repurchase program. During 2008, the Corporation repurchased 575,500 common shares at an average price of $4.56 per share.

At December 31, 2008 and 2007, the Bank and Corporation exceeded all applicable regulatory capital requirements as described in Note O of the Notes to the Consolidated Financial Statements.

Market Risk Analysis

The Corporation’s primary market risk exposure is interest rate risk and, to a lesser degree, liquidity risk. All of our transactions are denominated in U. S. dollars with no specific foreign exchange exposure. The Corporation has no agricultural-related loan assets and therefore has no significant exposure to changes in commodity prices. Any impact that changes in foreign exchange rates or commodity prices would have on interest rates are assumed to be insignificant. Interest rate risk is the exposure of our financial condition to adverse movements in interest rates. We derive our income primarily from the excess of interest collected on our interest-earning assets over the interest paid on our interest-bearing liabilities. The rates of interest earned on the assets and owed on our liabilities of the Corporation generally are established contractually for a period of time. Since market interest rates change over time, we are exposed to lower profitability if we cannot adapt to interest rate changes. Accepting interest rate risk can be an important source of profitability and shareholder value; however, excessive levels of interest rate risk could pose a significant threat to our earnings and capital base. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to our safety and soundness.

Interest Rate Sensitivity Analysis.Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control interest rate risk and the quantitative level of exposure. The Corporation’s interest rate risk management process seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain interest rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest rate risk, we assess the existing and potential future effects of changes in interest rates on our financial position, including capital adequacy, earnings, liquidity and asset quality.

The Corporation primarily uses two interest rate risk measurement techniques. The first, which is commonly referred to as GAP analysis, measures the difference between the dollars amounts of interest-sensitive assets and liabilities that will be repriced or mature during a given time period. The Corporation has sought to manage its exposure to changes in interest rates by matching more closely 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 than 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.

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 expected and would tend to increase the negative gap position. Conversely, during a period of falling 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 December 31, 2008 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	$	4,455		$	—		$	—	$	—	$	4,455
Interest bearing deposits with Banks		36,876			—			—		—		36,876
Mortgage loans held for sale		1,834			—			—		—		1,834
Securities available for sale		48,999			4,090			31,059		—		84,148
Federal Home Loan Bank stock		3,614			—			—		—		3,614
Total loans, net of non-accrual		225,325			80,315			530,033		45,888		881,561

Total earning assets		321,103			84,405			561,092		45,888		1,012,488

Interest bearing liabilities
Total interest bearing deposits		440,871			234,845			181,104		258		857,078
Federal Home Loan Bank advances		10,000			10,000			45,019		—		65,019
Other Borrowings		2,461			—			—		—		2,461
Subordinated debentures		10,000			—			—		—		10,000

Total interest bearing liabilities		463,332			244,845			226,123		258		934,558


Net asset (liability) funding gap		(142,229	)		(160,440	)		334,969		45,630	$	77,930


Cumulative net asset (liability) funding gap		($142,229	)		($302,669	)	$	32,300	$	77,930

The second interest rate measurement used is commonly referred to as net income simulation analysis. We believe that this methodology provides a more accurate measurement of interest rate risk than GAP analysis. The simulation model assesses the directions and magnitude of variations in net interest income resulting from potential changes in market interest rates. This model would normally display the impact of identical movements in either direction. However, the potential downward movement in the prime interest rate is limited due to the current level of of that interest rate. The maximum movement of that interest rate would be 100 basis points. Key assumptions in the model include prepayment speeds on various loan and investment assets; cash flows and maturities of interest-sensitive assets and liabilities; the variability of interest rate sensitivity of assets and liabilities; and changes in market conditions impacting loan and deposit volume and pricing. These assumption are inherently uncertain, subject to fluctuation and revision in a dynamic environment; therefore, the model cannot precisely estimate net interest income or exactly predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes, changes in market conditions and our strategies, among other factors.

We conducted an interest rate simulation as of December 31, 2008, that assumed a gradual change in market rates occurred over the following twelve months. The following table reflects the suggested impact on net interest income over the next twelve months (dollars, in thousands):


	Change in Net Interest Income
Interest Rate Change	Amount			Percent

+ 300 Basis Points	$	2,030			5.57	%
+ 200 Basis Points		1,634			4.49	%
+ 100 Basis Points		869			2.39	%
- 100 Basis Points		(259	)		-0.71	%

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 Corporation’s primary source of liquidity is its deposit base, raised through its retail branch system along with its unpledged securities, available for sale and overnight deposits with other banks. The Bank also has other wholesale sources of funds including brokered deposits, advances from the Federal Home Loan Bank of Indianapolis and borrowings from the Federal Reserve Bank.

Management evaluates the liquidity position of the Bank on a daily basis and makes appropriate decisions as to the utilizations of the Bank’s sources of funds and the deployment of excess cash. The Bank’s Deposit Pricing Committee is a sub-committee of the Bank’s Asset and Liability Committee and meets at least weekly. This Committee is comprised of the Chief Financial Officer, Controller, Head of Retail and Chief Deposit Officer. This Committee reviews the Bank’s available cash, available sources of funds, projected deposit maturity schedule and interest rates. This committee makes and enacts decisions regarding all aspects of the Bank’s deposits including the level of interest rates and was formed in order to react more quickly to the rapidly changing liquidity needs of the Bank.

Certain credit markets that the Corporation participated in previously and utilized as a primary source of funds became significantly disrupted and volatile since July 2008 and are no longer relied upon by management. As a result, the Bank has increased its level of deposits and investment securities that can be pledged as collateral.

The following tables provide information about the Bank’s contractual obligations and commitments at December 31, 2008 (in thousands):

Contractual Obligations


	Payments Due By Period
	Less Than				3-5		Over 5
	1 Year		1-3 Years		Years		Years		Total

Securities sold under agreements to repurchase	$	2,461	$	—	$	—	$	—	$	2,461
Certificates of deposit		354,166		179,993		1,370		—		535,529
Long-term borrowings		20,164		34,687		10,168		—		65,019
Lease commitments		782		1,080		73		—		1,935
Subordinated debentures		—		—		—		10,000		10,000


Totals	$	377,573	$	215,760	$	11,611	$	10,000	$	614,944

Unused Loan Commitments and Letters of Credit


	Amount Of Commitment Expiration Per Period
	Less Than				3-5		Over 5
	1 Year		1-3 Years		Years		Years		Total

Unused loan commitments	$	72,222	$	11,276	$	12,539	$	12,490	$	108,527
Standby letters of credit		2,945		27		2,000		—		4,972


Totals	$	75,167	$	11,303	$	14,539	$	12,490	$	113,499

Impact of Inflation and Changing Prices

The Consolidated Financial Statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation is reflected in the increased cost of the Corporation’s operations. Unlike most industrial companies, virtually all the assets and liabilities of the Corporation are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction, or to the same extent, as the prices of goods and services.

Technology

The Corporation, operating as an independent, local community bank, strives to make available to its employees and customers a high level of technology as a way to be competitive with other larger financial institutions.

The Bank has implemented the following technologies:

ATM Banking
In Touch Voice Response Telephone Banking
Netteller Internet Banking
Netteller Cash Management
Vertex Teller Automation
Streamline Platform Automation
Netteller Bill Pay
Remote Deposit Capture
Check 21
Electronic Cash Letter Delivery
Electronic Statements Interactice
DirectLine OFX (Open Financial Exchange)
ATM/Debit Card On-Line Real Time Processing
Remote Deposit Lockbox Processing
Mutual Fund Sweeps
Netteller Positive Pay
Overdraft Protection
Yellow Hammer Fraud Protection

During 2009, the Bank plans to implement the following technologies:

Cell Phone Banking
Teller Item Capture

DEARBORN BANCORP, INC.

DIRECTORS AND OFFICERS

DIRECTORS

MARGARET I. CAMPBELL
Retired, Manufacturing

JOHN E. DEMMER
Chairman of the Board and
Chief Executive Officer
Jack Demmer Ford, Inc.;
Jack Demmer Lincoln-Mercury, Inc. and
Jack Demmer Leasing

WILLIAM J. DEMMER
President
Jack Demmer Ford, Inc and
Jack Demmer Lincoln-Mercury, Inc.

MICHAEL V. DORIAN, JR.
President
Mike Dorian Ford

DAVID HIMICK
Retired, Industrial Supply

DONALD G. KARCHER
Agent
Karcher Agency, Inc.

BRADLEY F. KELLER
Retired
Former President
Braden Associates, Inc. and
MultiGard Properties, Ltd.

JEFFREY G. LONGSTRETH
Real Estate Broker
Century 21 — Curran & Christie

MICHAEL J. ROSS
President and Chief Executive Officer
Fidelity Bank

DR. ROBERT C. SCHWYN
Physician
Oaklane Medical

OFFICERS

JOHN E. DEMMER
Chairman of the Board

MICHAEL J. ROSS
President and Chief Executive Officer

JEFFREY L. KARAFA
Vice President, Treasurer and Secretary

FIDELITY BANK

DIRECTORS AND EXECUTIVE OFFICERS

DIRECTORS

MARGARET I. CAMPBELL
Retired, Manufacturing

JOHN E. DEMMER
Chairman of the Board
Jack Demmer Ford, Inc.;
Jack Demmer Lincoln-Mercury, Inc. and
Jack Demmer Leasing

WILLIAM J. DEMMER
President
Jack Demmer Ford, Inc. and
Jack Demmer Lincoln Mercury

MICHAEL V. DORIAN, JR.
President
Mike Dorian Ford

DAVID HIMICK
Retired, Industrial Supply

DONALD G. KARCHER
Agent
Karcher Agency, Inc.

BRADLEY F. KELLER
Retired
Former President
Braden Associates, Inc. and
MultiGard Properties, Ltd.

JEFFREY G. LONGSTRETH
Real Estate Broker
Century 21 — Curran & Christie

MICHAEL J. ROSS
President and Chief Executive Officer
Fidelity Bank

DR. ROBERT C. SCHWYN
Physician
Oaklane Medical

EXECUTIVE OFFICERS

MICHAEL J. ROSS
President
Chief Executive Officer

JEFFREY L. KARAFA
Senior Vice President
CFO & Secretary

JOHN A. LINDSEY
Oakland Regional President

WARREN R. MUSSON
Senior Vice President
Head of Lending

STEPHEN C. TARCZY
Northeast Regional President

JEFFREY J. WOLBER
Senior Vice President
Head of Retail

FIDELITY BANK
OFFICERS

FIRST VICE PRESIDENT

TERRENCE R. O’NEIL
First Vice President — Credit

VICE PRESIDENTS

GARY W. AMES, JR.
Vice President & Controller

THOMAS E. BELL
Vice President — Commercial Loans

DANIEL P. BROPHY
Vice President — Commercial Loans

KATHERINE T. BROWN
Vice President — Commercial Loans

DANIEL A. BZURA
Vice President — Branch Operations

RITA L. CAVATAIO
Vice President — Commercial Loans

GEORGE J. DEMOU
Vice President — Commercial Loans

FRANK J. FILECCIA
Vice President — Business Development

CYNTHIA A. FRAGA
Vice President — Commercial Loans

LEE E. FREELAND
Vice President — Sales Administration

JIHAD A. HACHEM
Vice President — Commercial Loans

ALLEN E. HEIMER
Vice President — Commercial Loans

F. GLEN ISLAMI
Vice President — Compliance

DEBRA S. LEONARD
Vice President — Product Delivery

DAVID W. LESLIE
Vice President — Commercial Loans

TERRENCE P. LEVINS
Vice President — Commercial Loans

WYNN C. MILLER
Vice President — Internal Audit

REGAN J. MORIN
Vice President — Commercial Loans

MARK M. PACITTO
Vice President — Commercial Loans

STEVEN M. PELTZ
Vice President — Commercial Loans

ELIZABETH A. PIZZO
Vice President — Human Resources

JAMES T. POWERS
Vice President — Product Support

DENNIS C. ROCHELEAU
Vice President & Cashier

GARY P. RUSCH
Vice President — Commercial Loans

GREGORY M. SCHNEIDER
Vice President — Commercial Loans

STEVEN P. SLADE
Vice President — Consumer Loans

RICHARD K. VALLEE
Vice President — BSA and Security

SUSAN VETTRAINO
Vice President — Internal Controls

BRADY J. VIBERT
Vice President — Commercial Loans

CHRISTOPHER E. WESTPHAL
Vice President — Commercial Loans

PAMELA G. WILKS
Vice President — Product Support

ASSISTANT VICE PRESIDENTS

DEBBY M. ASTERIOU

PATRICIA CARMONA

KAREN M. COVER

PATRICIA L. DANCIK

DONALD D. HARBIN

NADINE S. MCMILLAN

DAN K. MORRIS

MIHAI PARASCA

MARIAN Z. SMRCKA

FIRST LEVEL OFFICERS

STEPHENI C. AGUILA

DIANE E. AVERILL

MARK D. BOWERS

V. STACY BRANHAM

TERRENCE W. CARLSON

TIMOTHY D. COLLINS

KAREN B. DEVRIES

JENNIFER E. DOWNHAM

DANIEL C. GILBERT

DUANE J. HINKLEY

ANGELA HSU

MILY H. HUBENY

RICHARD T. JONES

SANDRA L. LETHBRIDGE

LISA M. LOBB

CHARLES P. WASCZENSKI

CAROLYN A. WILKINS

FIDELITY BANK

SUBSIDIARIES

COMMUNITY BANK INSURANCE AGENCY, INC.
Michael J. Ross, President

COMMUNITY BANK AUDIT SERVICES, INC.
Wynn C. Miller, President

NORTHEAST REGION
AUXILIARY BOARD OF DIRECTORS

DAVID B. BERGMAN
Partner
Sigma Investment Counselors

DR. MICHAEL J. BUSUITO
Physician

GERALD J. CARNAGO
Attorney at Law & Certified Public Accountant
Carnago & Associates, P.C.

MICHAEL P. GUERRA
Owner
Millcreek Building Company

VITO A. PAMPALONA
President
Vito Anthony Homes and Building Company

JAMES A. PATRONA
Owner
Universal Press & Machinery, Inc.

FIDELITY BANK
LOCATIONS


Ann Arbor / Eisenhower Banking Center		Dearborn Administrative and
250 West Eisenhower Parkway, Suite 100		Regional Lending Center
Ann Arbor, MI 48103		1360 Porter Street
Phone: (734) 302-1481		Dearborn, MI 48124
		Phone (313) 565-5700
Ann Arbor / Stadium Banking Center
2180 West Stadium Boulevard		Dearborn Heights Banking Center
Ann Arbor, MI 48103		24935 W. Warren Avenue
Phone: (734) 302-9165		Dearborn Heights, MI 48127
		Phone: (313) 724-0100
Auburn Hills Banking Center
3201 University Drive, Suite 180		Plymouth Township Banking Center
Auburn Hills, MI 48326		44623 Five Mile
Phone: (248) 364-9700		Plymouth Township, MI 48170
		Phone: (734) 454-1000
Bingham Farms Banking Center
30700 Telegraph		Saline Banking Center
Bingham Farms, MI 48025		450 E. Michigan Avenue
Phone: (248) 642-6757		Saline, MI 48176
		Phone: (734) 429-3828
Birmingham Banking and Regional Lending Center
1040 E. Maple		Shelby Township Banking Center
Birmingham, MI 48009		7755 23 Mile Road
Phone: (248) 642-1901		Shelby Township, MI 48316
		Phone: (586) 254-8700
Bloomfield Township Banking Center
3681 W. Maple		Southgate Banking Center
Bloomfield Township, MI 48301		12820 Fort Street
Phone: (248) 642-1903		Southgate, MI 48195
		Phone: (734) 284-3300
Canton Township Banking Center
1325 N. Canton Center Road		Southfield/Galleria Banking Center
Canton, MI 48187		200 Galleria Office Center
Phone: (734) 981-0022		Southfield, MI 48034
		Phone: (248) 352-1580
Clinton Township Banking Center
19100 Hall Road		Southfield/Twelve Mile Banking Center
Clinton Township, MI 48038		20000 12 Mile Road
Phone: (586) 416-4400		Southfield, MI 48034
		Phone: (248) 559-5779
Clinton Township Regional Lending Center
45000 River Ridge Drive, Suite 110		Bank Operations Center
Clinton Township, MI 48038		4000 Allen Road
Phone: (586) 416-0200		Allen Park, MI 48101
		Phone: (313) 381-3200
Dearborn / Main Office Banking Center
22290 Michigan Avenue
Dearborn, MI 48124
Phone: (313) 274-1000

DEARBORN BANCORP, INC. COMMON STOCK

Dearborn Bancorp, Inc. common stock is listed on the Nasdaq Global Market and is traded under the symbol “DEAR”.

INVESTOR RELATIONS AND FORM 10-K AVAILABLE

Additional information about the Corporation including a free copy of the Corporation’s Form 10-K filed with the Securities and Exchange Commission may be obtained by writing or calling: Carolyn Wilkins, Corporate Services Officer, 4000 Allen Road, Allen Park, Michigan 48101; (313) 381-3200 or by E-mail at Carolyn.Wilkins@fidbank.com.

ANNUAL MEETING

The Annual Meeting of Stockholders will be held on Tuesday, May 19, 2009, at Park Place, 23400 Park Avenue, Dearborn, Michigan, at
3:00 p.m.

INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

BKD, LLP
201 North Illinois Street, Suite 700
P. O. Box 44998
Indianapolis, IN 46244-0998
(317) 383-3665

STOCK TRANSFER AGENT AND REGISTRAR

Stockholders requiring a change of name, address or ownership of stock, as well as information about shareholder records or lost or stolen certificates, dividend checks, dividend direct deposit, and dividend reinvestment should contact:

Computershare Trust Company, N.A.
P. O. Box 43070
Providence, RI, 02940-3070
(800) 962-4284
www.computershare.com

WEBSITE INFORMATION

Online Information for the most current news releases and Dearborn Bancorp, Inc. financial reports and product information, visit our Website at www.fidbank.com

QUARTERLY COMMON STOCK PRICE INFORMATION


	High		Low		Close

2008
First quarter	$	8.72	$	5.38	$	7.60
Second quarter		7.70		4.74		4.86
Third quarter		10.00		3.81		4.99
Fourth quarter		6.99		0.93		1.66

2007
First quarter	$	19.59	$	17.00	$	17.49
Second quarter		18.26		15.03		16.95
Third quarter		17.90		12.20		12.91
Fourth quarter		13.48		7.10		7.73

All per share amounts presented have been adjusted to reflect the issuance of stock dividends.

CUMULATIVE STOCK PERFORMANCE GRAPH

The graph and table that follow show the cumulative return on the Common Stock from December 31, 2003 through December 31, 2008. This return is compared in the table and graph with the cumulative return over the same period with the following two indices: (i) the All U.S. Nasdaq Index and (ii) the Nasdaq Bank Index. The graph and table were prepared assuming that $100 was invested on December 31, 2002 in the Common Stock and in each of the indices. Cumulative total return on the Common Stock or the two indices equals the total increase (decrease) in value since December 31, 2002. The stockholder returns shown on the performance graph are not necessarily indicative of the future performance of the Common Stock or any particular index.

COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG DEARBORN BANCORP, INC.,
THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ BANK INDEX


	Dearborn Bancorp, Inc.		Nasdaq Stock Market (U.S.)		Nasdaq Bank

12/31/2003	$	100.00	$	100.00	$	100.00
12/31/2004	$	161.63	$	108.84	$	114.44
12/31/2005	$	151.25	$	111.16	$	111.80
12/31/2006	$	128.01	$	122.11	$	125.47
12/31/2007	$	52.08	$	132.42	$	99.45
12/31/2008	$	11.18	$	63.80	$	72.51

PRINCIPAL MARKET MAKERS

Automated Trading Desk
Financial Services, LLC
11 E. Wall Street
Mount Pleasant, SC 29464
(843) 789-2000

B-Trade Services, LLC
1633 Broadway, 48^th Floor
New York, NY 10019
(212) 448-5690

Citadel Derivatives Group, LLC
131 South Dearborn Street, 32^nd Floor
Chicago, IL 60603
(312) 395-2100

Citigroup Global Market Holdings, Inc.
388 Greenwich St., 38^th Floor
New York, NY 10013
(212) 816-6000

E*Trade Capital Markets, LLC
One Financial Place
440 S. Lasalle St., Suite 3030
Chicago, IL 60605
201-499-9858

FIG Partners, LLC
1175 Peachtree Street, NE
100 Colony Square, Suite 2250
Atlanta, GA 30361
(404) 601-7200

Hill Thompson Magid, & Co.
15 Exchange Place, Suite 800
Jersey City, NJ 07302
(201) 434-6900

Howe Barnes Hoefer & Arnett, Inc.
222 S. Riverside Plaza, 7^th Floor
Chicago, Illinois 60606
(312) 655-3000

Knight Equity Markets, L.P.
545 Washington Boulevard
Jersey City, NJ 07310
(201) 557-6886

Oppenheimer & Co, Inc.
125 Broad Street, 14^th Floor
New York, NY 10004
(212) 668-8000

Raymond James & Associates, Inc.
880 Carillon Parkway
St. Petersburg, FL 33716
(727) 567-1000

Ryan Beck & Co., Inc.
18 Columbia Turnpike, 1^st Floor
Florham Park, NJ 07932
(973) 597-6000

Susquehanna Capital Group
401 City Line Avenue, Suite 220
Bala Cynwyd, PA 19004
(610) 617-2600

UBS Securities, LLC
677 Washington Blvd., 6^th Floor
Stamford, CT 06901
(203) 719-3000

DEARBORN BANCORP, INC.
1360 Porter Street

Dearborn, Michigan 48124

Phone: (313) 565-5700

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

Dearborn Bancorp (DEAR) Inactive 10-K2008 FY Annual report

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