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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly period ended March 31, 2009
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number 000-24478.
DEARBORN BANCORP, INC.
(Exact name of registrant as specified in its charter)
Michigan | 38-3073622 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1360 Porter Street, Dearborn, MI | 48124 | |
(Address of principal executive office) | (Zip Code) |
(313) 565-5700
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in rule 12b-2 of the 1934 Securities and Exchange Act).
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark if the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act.
Yes o No þ
Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of April 30, 2009.
Class | Shares Outstanding | |
Common Stock | 7,696,204 |
DEARBORN BANCORP, INC.
INDEX
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Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Dearborn Bancorp, Inc.
Dearborn, Michigan
Dearborn Bancorp, Inc.
Dearborn, Michigan
We have reviewed the accompanying condensed consolidated balance sheet of Dearborn Bancorp, Inc. as of March 31, 2009 and 2008 and the related condensed consolidated statements of operations and comprehensive income (loss) and condensed consolidated statements of cash flows for the three-month periods ended March 31, 2009 and 2008. These interim financial statements are the responsibility of the Corporation’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the consolidated condensed financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2008 and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 20, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2008 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
BKD, LLP
Indianapolis, Indiana
May 15, 2009
Indianapolis, Indiana
May 15, 2009
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DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars, in thousands) | 03/31/09 | 12/31/08 | 03/31/08 | |||||||||
ASSETS | ||||||||||||
Cash and cash equivalents | ||||||||||||
Cash and due from banks | $ | 11,881 | $ | 11,671 | $ | 12,736 | ||||||
Federal funds sold | 6,841 | 4,455 | 1,958 | |||||||||
Interest bearing deposits with banks | 53,262 | 36,876 | 105 | |||||||||
Total cash and cash equivalents | 71,984 | 53,002 | 14,799 | |||||||||
Mortgage loans held for sale | 3,009 | 1,834 | 282 | |||||||||
Investment securities, available for sale | 45,368 | 84,148 | 8,921 | |||||||||
Federal Home Loan Bank stock | 3,614 | 3,614 | 3,540 | |||||||||
Loans | ||||||||||||
Loans | 900,055 | 933,269 | 947,927 | |||||||||
Allowance for loan losses | (18,632 | ) | (14,452 | ) | (10,749 | ) | ||||||
Net loans | 881,423 | 918,817 | 937,178 | |||||||||
Premises and equipment, net | 21,001 | 21,272 | 22,546 | |||||||||
Real estate owned | 14,624 | 9,657 | 6,183 | |||||||||
Goodwill | — | — | 34,028 | |||||||||
Other intangible assets | 4,394 | 4,592 | 10,810 | |||||||||
Accrued interest receivable | 3,920 | 3,499 | 4,134 | |||||||||
Other assets | 24,407 | 21,483 | 5,208 | |||||||||
Total assets | $ | 1,073,744 | $ | 1,121,918 | $ | 1,047,629 | ||||||
LIABILITIES | ||||||||||||
Deposits | ||||||||||||
Non-interest bearing deposits | $ | 80,624 | $ | 81,317 | $ | 80,725 | ||||||
Interest bearing deposits | 826,955 | 857,078 | 688,492 | |||||||||
Total deposits | 907,579 | 938,395 | 769,217 | |||||||||
Other liabilities | ||||||||||||
Federal funds purchased | — | — | 56,480 | |||||||||
Securities sold under agreements to repurchase | 2,268 | 2,461 | 275 | |||||||||
Federal Home Loan Bank advances | 54,955 | 65,019 | 70,795 | |||||||||
Accrued interest payable | 1,372 | 1,695 | 2,548 | |||||||||
Other liabilities | 606 | 1,037 | 1,017 | |||||||||
Subordinated debentures | 10,000 | 10,000 | 10,000 | |||||||||
Total liabilities | 976,780 | 1,018,607 | 910,332 | |||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||
Common stock — 20,000,000 shares authorized, 7,696,204 shares at 03/31/09, 7,696,204 shares at 12/31/08; and 8,106,413 shares at 03/31/08 | 131,825 | 131,784 | 133,332 | |||||||||
Retained earnings (accumulated deficit) | (34,923 | ) | (28,675 | ) | 3,926 | |||||||
Accumulated other comprehensive income | 62 | 202 | 39 | |||||||||
Total stockholders’ equity | 96,964 | 103,311 | 137,297 | |||||||||
Total liabilities and stockholders’ equity | $ | 1,073,744 | $ | 1,121,918 | $ | 1,047,629 | ||||||
The accompanying notes are an integral part of these condensed consolidated statements.
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DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended | Three Months Ended | |||||||
(In thousands, except share and per share data) | 03/31/09 | 03/31/08 | ||||||
Interest income | ||||||||
Interest on loans | $ | 13,810 | $ | 16,174 | ||||
Interest on securities, available for sale | 256 | 108 | ||||||
Interest on federal funds | 6 | 16 | ||||||
Interest on deposits with banks | 94 | 1 | ||||||
Total interest income | 14,166 | 16,299 | ||||||
Interest expense | ||||||||
Interest on deposits | 5,998 | 7,028 | ||||||
Interest on other borrowings | 546 | 993 | ||||||
Interest on subordinated debentures | 105 | 225 | ||||||
Total interest expense | 6,649 | 8,246 | ||||||
Net interest income | 7,517 | 8,053 | ||||||
Provision for loan losses | 10,727 | 886 | ||||||
Net interest income (loss) after provision for loan losses | (3,210 | ) | 7,167 | |||||
Non-interest income | ||||||||
Service charges on deposit accounts | 355 | 380 | ||||||
Fees for other services to customers | 25 | 39 | ||||||
Gain on the sale of loans | 56 | 53 | ||||||
Gain on the sale of securities, available for sale | 195 | — | ||||||
Gain (loss) on the sale of real estate owned | 29 | (235 | ) | |||||
Write-down on real estate owned | (354 | ) | (200 | ) | ||||
Loss on the sale of real estate owned | (100 | ) | — | |||||
Other income | 122 | 74 | ||||||
Total non-interest income | 328 | 111 | ||||||
Non-interest expenses | ||||||||
Salaries and employee benefits | 3,290 | 3,209 | ||||||
Occupancy and equipment expense | 934 | 913 | ||||||
Intangible expense | 198 | 323 | ||||||
FDIC assessment | 348 | 174 | ||||||
Advertising and marketing | 70 | 123 | ||||||
Stationery and supplies | 111 | 133 | ||||||
Professional services | 191 | 226 | ||||||
Data processing | 228 | 225 | ||||||
Defaulted loan expense | 761 | 435 | ||||||
Other operating expenses | 380 | 477 | ||||||
Total non-interest expenses | 6,511 | 6,238 | ||||||
Income (loss) before income tax provision | (9,393 | ) | 1,040 | |||||
Income tax provision | (3,144 | ) | 364 | |||||
Net income (loss) | ($6,249 | ) | $ | 676 | ||||
Per share data: | ||||||||
Net income (loss)- basic | ($0.81 | ) | $ | 0.08 | ||||
Net income (loss)- diluted | ($0.81 | ) | $ | 0.08 | ||||
Weighted average number of shares outstanding — basic | 7,696,204 | 8,139,721 | ||||||
Weighted average number of shares outstanding — diluted | 7,696,204 | 8,198,676 |
The accompanying notes are an integral part of these condensed consolidated condensed statements.
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DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
Three Months Ended | Three Months Ended | |||||||
(In thousands) | 03/31/09 | 03/31/08 | ||||||
Net income (loss) | ($6,249 | ) | $ | 676 | ||||
Other comprehensive income (loss), net of tax | ||||||||
Unrealized gains on securities | ||||||||
Unrealized holding gains arising during period | (407 | ) | 29 | |||||
Less: reclassification adjustment for gains included in net income | 195 | — | ||||||
Tax effects | 72 | (10 | ) | |||||
Other comprehensive income (loss) | (140 | ) | 19 | |||||
Comprehensive income (loss) | ($6,389 | ) | $ | 695 | ||||
The accompanying notes are an integral part of these condensed consolidated statements.
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DEARBORN BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended | ||||||||
(In thousands) | 3/31/2009 | 3/31/2008 | ||||||
Cash flows from operating activities | ||||||||
Interest and fees received | $ | 13,745 | $ | 15,981 | ||||
Interest paid | (6,972 | ) | (8,866 | ) | ||||
Proceeds from sale of mortgages held for sale | 6,990 | 5,526 | ||||||
Origination of mortgages held for sale | (8,062 | ) | (5,135 | ) | ||||
Taxes paid (refunded) | — | 219 | ||||||
Proceeds from the sale of real estate owned | 2,891 | 2,891 | ||||||
Cash paid to suppliers and employees | (7,219 | ) | (5,620 | ) | ||||
Net cash provided by operating activities | 1,373 | 4,996 | ||||||
Cash flows from investing activities | ||||||||
Proceeds from the sale of securities available for sale | 10,230 | 3,850 | ||||||
Proceeds from calls, maturities and repayments of of securities available for sale | 49,014 | 23 | ||||||
Purchases of securities available for sale | (20,709 | ) | (3,807 | ) | ||||
Purchase of Federal Home Loan Bank stock | — | (1,468 | ) | |||||
Increase in loans, net of payments received | 20,211 | 613 | ||||||
Purchases of property and equipment | (64 | ) | (113 | ) | ||||
Net cash paid in Fidelity acquisition | — | — | ||||||
Net cash provided by (used in) investing activities | 58,682 | (902 | ) | |||||
Cash flows from financing activities | ||||||||
Net increase (decrease) in non-interest bearing deposits | (693 | ) | (2,869 | ) | ||||
Net increase (decrease) in interest bearing deposits | (30,123 | ) | (50,541 | ) | ||||
Decrease in other borrowings | (193 | ) | (205 | ) | ||||
Net increase (decrease) in federal funds payable | — | 26,380 | ||||||
Proceeds from Federal Home Loan Bank advances | (10,064 | ) | 29,425 | |||||
Purchase of common stock | — | (967 | ) | |||||
Net cash provided by (used in) financing activities | (41,073 | ) | 1,223 | |||||
Increase in cash and cash equivalents | 18,982 | 5,317 | ||||||
Cash and cash equivalents at the beginning of the period | 53,002 | 9,482 | ||||||
Cash and cash equivalents at the end of the period | $ | 71,984 | $ | 14,799 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Three Months Ended | ||||||||
(In thousands) | 3/31/2009 | 3/31/2008 | ||||||
Reconciliation of net income to net cash provided by operating activities | ||||||||
Net income (loss0 | ($6,249 | ) | $ | 676 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Provision for loan losses | 10,727 | 886 | ||||||
Depreciation and amortization expense | 335 | 349 | ||||||
Restricted stock award expense | 22 | 14 | ||||||
Stock option expense | 19 | 6 | ||||||
Accretion of discount on investment securities | 33 | (55 | ) | |||||
Amortization of premium on investment securities | — | — | ||||||
Amortization of intangible assets | 198 | 323 | ||||||
(Increase) Decrease in mortgages held for sale | (1,175 | ) | 1,034 | |||||
Increase in interest receivable | (421 | ) | (318 | ) | ||||
Decrease in interest payable | (323 | ) | (639 | ) | ||||
(Increase) decrease in real estate owned | 1,489 | 2,926 | ||||||
(Increase) decrease in other assets | (2,851 | ) | 465 | |||||
Decrease in other liabilities | (431 | ) | (671 | ) | ||||
Net cash provided by operating activities | $ | 1,373 | $ | 4,996 | ||||
Supplemental noncash disclosures: | ||||||||
Transfers from loans to real estate owned | $ | 6,456 | $ | 2,790 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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DEARBORN BANCORP, INC.
FORM 10-Q (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
A. | Accounting and Reporting Policies | |
The condensed consolidated financial statements of Dearborn Bancorp, Inc. (the “Corporation”) include the consolidation of its only subsidiary, Fidelity Bank (the “Bank”). The accounting and reporting policies of the Corporation are in accordance with accounting principles generally accepted in the United States of America and conform to practice within the banking industry. | ||
The condensed consolidated financial statements of the Corporation as of March 31, 2009 and 2008, and December 31, 2008 and for the three period ended March 31, 2009 and 2008 reflect all adjustments, consisting of normal recurring items which are in the opinion of management, necessary for a fair presentation of the results for the interim period. The consolidated condensed balance sheet of the Corporation as of December 31, 2008 has been derived from the audited consolidated balance sheet as of that date. The operating results for the three month period ended March 31, 2009 are not necessarily indicative of results of operations for the entire year. | ||
The condensed consolidated financial statements as of March 31, 2009 and 2008, and for the three month ended March 31, 2009 and 2008 included herein have been prepared by the Corporation, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in interim financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereon included in the Corporation’s 2008 Annual Report to Stockholders on Form 10-K. | ||
Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these material judgments include, but without limitation, changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and determining the fair value of securities and other financial instruments and assessing other than temporary impairments of securities. |
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A. | Accounting and Reporting Policies (con’t) | |
Income Per Share | ||
Basic income per share is net income divided by the weighted average number of common shares outstanding during the period. Diluted income per share includes the dilutive effect of additional potential common shares issuable under stock options. Income per share is restated for all stock splits and dividends through the date of issue of the financial statements. | ||
Factors in the basic and diluted income per share calculation follow (in thousands, except share and per share data): |
Three Months Ended | ||||||||
3/31/2009 | 3/31/2008 | |||||||
Basic | ||||||||
Net income (loss) | ($6,249 | ) | $ | 676 | ||||
Weighted average common shares | 7,696,204 | 8,139,721 | ||||||
Basic earnings per common share | ($0.81 | ) | $ | 0.08 | ||||
Diluted | ||||||||
Net income (loss) | ($6,249 | ) | $ | 676 | ||||
Weighted average common shares outstanding for basic earnings per common share | 7,696,204 | 8,139,721 | ||||||
Add: Dilutive effects of assumed exercise of stock options | — | 58,955 | ||||||
Average shares and dilutive potential common shares | 7,696,204 | 8,198,676 | ||||||
Dilutive earnings per common share | ($0.81 | ) | $ | 0.08 |
Stock options for 619,742 and 80,788 shares of common stock were not considered in computing diluted earnings per common share for the three months ended March 31, 2009 and 2008, respectively, because they were antidilutive. All share and per share amounts have been adjusted for stock dividends. |
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A. | Accounting and Reporting Policies (con’t) | |
Effect of Newly Issued Accounting Standards | ||
SFAS No. 141 (revised 2007),Business Combinations | ||
The objective of this Statement is to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. This Statement introduces new accounting concepts, and several of these changes have the potential to generate greater earnings volatility, in connection with and after an acquisition. Some of the more significant changes include: |
1. | Transaction costs and restructuring charges will now be expensed. | ||
2. | The accounting for certain assets acquired and liabilities assumed will change significantly. The most significant to the Company being that allowance for loan losses at acquisition date will be eliminated. | ||
3. | Contingent consideration will be measured at fair value until settled. | ||
4. | Equity issued in an acquisition will be valued at the closing date, as opposed to the announcement date. | ||
5. | Material adjustments made to the initial acquisition will be recorded back to the acquisition date. |
The adoption of this statement did not have a material impact on the Corporation’s consolidated financial statements. | ||
SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51 | ||
This statement amends ARB 51 to establish 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 statements. Before this statement was issued, limited guidance existed for reporting noncontrolling interests. As a result, considerable diversity in practice existed. Socalled minority interests were reported in the consolidated statement of financial position as liabilities or in the mezzanine section between liabilities and equity. This statement improves comparability by eliminating that diversity. The adoption of this statement did not have a material impact on the Corporation’s consolidated financial statements. |
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A. | Accounting and Reporting Policies (con’t) | |
SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities—An Amendment FASB Statement No. 133 | ||
This Statement was issued in March 2008 and amends and expands the disclosure requirements of SFAS No. 133 to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS No. 133 and its related interpretations and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. | ||
The adoption of this statement did not have a material impact on the Corporation’s consolidated financial statements. | ||
FASB Staff Position (FSP) FAS 141(R)-1,Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies | ||
This FSP amends and clarifies FAS 141(R),Business Combinations, regarding the initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. This FSP eliminates the distinction between contractual and noncontractual contingencies discussed in FAS 141(R), specifies whether contingencies should be measured at fair value or in accordance with FAS 5, provides application guidance on subsequent accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies and establishes new disclosure requirements. This FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this staff position did not have a material impact on the Corporation’s consolidated financial statements. |
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A. | Accounting and Reporting Policies (con’t) | |
FSP FAS 157-4—Determining Fair Value When the Volume and Level of Activity for The Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly | ||
This FSP, issued on April 9, 2009, provides additional guidance for estimating fair value in accordance with FASB Statement No. 157,Fair Value Measurements,when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. Even if there has been a significant decrease in the volume and level of activity regardless of valuation technique, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009 only if FSP FAS 115-2 and FAS 124-2 and FSP FAS 107-1 and APG 28-1 are adopted concurrently. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. The adoption of this staff position is not expected to have a material impact on the Corporation’s consolidated financial statements. | ||
FSP No. 115-2 and FAS 124-2—Recognition and Presentation of Other-Than-Temporary Impairments | ||
Issued on April 9, 2009, this FSP amends FASB Statement No. 107,Disclosures about Fair Value of Financial Instrumentsand APB Opinion No. 28,Interim Financial Reporting,to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009 only if FSP FAS 157-4 and FSP FAS 107-1 and APG 28-1 are adopted concurrently. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. The adoption of this staff position is not expected to have a material impact on the Corporation’s consolidated financial statements. |
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A. | Accounting and Reporting Policies (con’t) | |
FSP No. 107-1 and APG 28-1—Interim Disclosures about Fair Value of Financial Instruments | ||
This FSP issued on April 9, 2009 amends the other-than-temporary guidance in U.S. generally accepted accounting principles for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities and does not require disclosures for earlier periods presented for comparative purposes at initial adoption. Effective for interim reporting periods ending after June 15, 2009, early adoption is permitted for periods ending after March 15, 2009 only if FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2 are adopted concurrently. The adoption of this staff position is not expected to have a material impact on the Corporation’s consolidated financial statements. |
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B. | Securities Available For Sale | |
The amortized cost and fair value of securities available for sale are as follows (in thousands): |
March 31, 2009 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
US Government sponsored entity securities | $ | 28,627 | $ | 37 | ($7 | ) | $ | 28,657 | ||||||||
Corporate bonds | 15,180 | 43 | (18 | ) | 15,205 | |||||||||||
Municipal securities | 1,302 | 33 | — | 1,335 | ||||||||||||
Mortgage backed securities | 165 | 6 | — | 171 | ||||||||||||
Totals | $ | 45,274 | $ | 119 | ($25 | ) | $ | 45,368 | ||||||||
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 | ||||||||
The amortized cost and fair value of securities available for sale at March 31, 2009 by contractual maturity are shown below (in thousands):
Amortized | Fair | |||||||
Cost | Value | |||||||
Due in less than one year | $ | 4,096 | $ | 4,114 | ||||
Due in one year through five years | 40,733 | 40,797 | ||||||
Due in greater than five years | 280 | 286 | ||||||
Mortgage backed securities | 165 | 171 | ||||||
Totals | $ | 45,274 | $ | 45,368 | ||||
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B. | Securities Available for Sale (con’t) | |
The entire portfolio has a net unrealized gain of $94,000 at March 31, 2009. Securities with unrealized losses at March 31, 2009, aggregated by investment category are as follows (in thousands): |
Less than one year | One year or more | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Investment category | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
US Government sponsored entity securities | — | — | $ | 7,273 | $ | 7 | $ | 7,273 | $ | 7 | ||||||||||||||
Corporate bonds | — | — | 7,125 | 18 | 7,125 | 18 | ||||||||||||||||||
Total temporarily impaired | $ | — | $ | — | $ | 14,398 | $ | 25 | $ | 14,398 | $ | 25 | ||||||||||||
Unrealized losses on securities, available for sale at March 31, 2009 have not been realized because these securities are of high credit quality, management has the intent and ability to hold these securities for the foreseeable future, and the decline in fair value is believed to be largely due to changes in interest rates. The fair value is expected to recover as the bonds approach their maturity date. These securities have been in a continuous loss position for less than one year.
The Corporation does not hold any securities in the “Held to Maturity” category nor does the Corporation hold or utilize derivatives.
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C. | Loans | |
The aggregate balance in impaired loans are as follows (in thousands): |
03/31/09 | 12/31/08 | 03/31/08 | ||||||||||
Impaired loans with no allocated allowance for loan losses | $ | 95,499 | $ | 71,961 | $ | 121,778 | ||||||
Impaired loans with allocated allowance for loan losses | 12,600 | 26,908 | 17,340 | |||||||||
Total | $ | 108,099 | $ | 98,869 | $ | 139,118 | ||||||
Amount of the allowance for loan loss allocated | $ | 4,915 | $ | 5,273 | $ | 1,719 |
D. | Incentive Stock Plans | |
Incentive stock awards have been granted to officers and employees under two Incentive Stock Plans. The first plan is the 1994 Stock Option Plan. Options to buy common stock have been granted to officers and employees under the 1994 Stock Option Plan, which provides for issue of up to 738,729 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. | ||
There was no option activity during the first quarter of 2009. For the options outstanding at March 31, 2009, the range of exercise prices was $4.18 to $14.65 per share with a weighted-average remaining contractual term of 2.8 years. At March 31, 2009, 360,398 options were exercisable at weighted average exercise price of $8.65 per share. There were no options exercised during the quarter. There was no intrinsic value at March 31, 2009. | ||
During 2005, the Corporation initiated the 2005 Long-Term Incentive Plan. Under this plan, up to 347,248 shares may be granted to officers and employees of the Bank. This plan provides that stock awards may take the form of any combination of options, restricted shares, restricted share units or performance awards. | ||
The administration of the plan, including the granting of awards and the nature of those awards is determined by the Corporation’s Compensation Committee. The Corporation’s Board of Directors approved grants of stock options and restricted stock in 2005, 2006 and 2008. The awards have a term of ten years and typically vest fully three years from the grant date. In order for vesting to occur with some grants, the Corporation must meet certain performance criteria over the vesting period. The expected compensation cost of the 2005 plan is being calculated assuming the Corporation’s attainment of “target” performance goals over the vesting period of the awards. The actual cost of these awards could range from zero to 100% of the currently recorded compensation cost, depending on the Corporation’s actual performance. The awards granted in 2005 and 2006 did have such performance criteria. The awards granted in 2008 did not have performance criteria. | ||
D. | Incentive Stock Plans (con’t) | |
Stock Options Granted — Stock options were awarded to officers in 2005, 2006 and 2008. The incentive stock options were granted with exercise prices equal to market prices on |
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the day of grant. At March 31, 2009, there were 205,662 stock options outstanding with a weighted average exercise price of $5.89. At March 31, 2009, 67,877 stock options were vested fully. | ||
The Corporation recognized stock option compensation expense of $19,000 during the three months ended March 31, 2009. Compensation cost of $69,000 and $62,000 is expected to be recognized during 2009 and 2010, respectively. | ||
Restricted Stock Grants — Restricted stock was awarded to officers in 2005, 2006 and 2008. The restricted stock is eligible to vest three years from grant date. Upon full vesting, restricted shares are transferred to common shares. At March 31, 2009, there were 52,016 shares of restricted stock outstanding. | ||
The Corporation recognized restricted stock compensation expense of $22,000 during the three months ended March 31, 2009. Compensation cost of $75,000 and $62,000 is expected to be recognized during 2009 and 2010, respectively. | ||
E. | Fair Value of Assets and Liabilities | |
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 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 |
E. | Fair Value of Assets and Liabilities ( con’t) | |
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. |
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Securities available for sale | ||
Fair values of 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 March 31, 2009 and December 31, 2008 (in thousands): |
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
At 3/31/2009 | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Securities, available for sale | $ | 45,368 | $ | — | $ | 45,368 | $ | — |
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
At 12/31/2008 | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Securities, available for sale | $ | 84,148 | $ | 48,000 | $ | 36,148 | $ | — |
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E. | Fair Value of Assets and Liabilities (con’t) | |
Impaired loans and other real estate owned | ||
Fair value adjustments for impaired and non-accrual loans typically occur when there is evidence of impairment. Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. The Company measures fair value based on the value of the collateral securing the loans. Collateral may be in the form of real estate or personal property including equipment and inventory. The value of the collateral is determined based on internal estimates as well as third party appraisals or non-binding broker quotes. These measurements were classified as Level 3. The fair value of the Company’s other real estate owned is determined using Level 3 inputs, which include current and prior appraisals and estimated costs to sell. | ||
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 March 31, 2009 and December 31, 2008 (in thousands): |
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
At 3/31/2009 | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Loans | $ | 11,461 | $ | — | $ | — | $ | 11,461 | ||||||||
Real estate owned | 14,624 | — | — | 14,624 |
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
At 12/31/2008 | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Loans | $ | 41,907 | $ | — | $ | — | $ | 41,907 |
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F. Allowance for Loan Losses
The allowance for loan losses was $18,632,000 at March 31, 2009 compared to $14,452,000 at December 31, 2008, an increase of $4,180,000 or 29%. The increase was primarily due to net charge-offs of $6,547,000 and the continuing deterioration of the underlying collateral of the Bank’s non-performing loans. A primary factor in the continued decline in the underlying value of our collateral and the decision to recognize these charge-offs during the first quarter of 2009 was the accelerating decline in the economic environment in Southeastern Michigan which is heavily impacted by conditions and events that have recently impacted the automotive industry during the first quarter of 2009 and its impact on the residential real estate market in the Bank’s market area. These conditions have led to an increase in the Bank’s classified assets during the first quarter of 2009. Management has recognized this trend in our analysis of the allowance for loan losses at March 31, 2009. The allowance for loan losses was based upon management’s assessment of relevant factors, including loan growth, types and amounts of non-performing loans, historical and anticipated loss experience on such types of loans, and current economic conditions.
The following is an analysis of the allowance for loan losses (in thousands):
Three Months | Three Months | |||||||||||
Ended | Year Ended | Ended | ||||||||||
03/31/09 | 12/31/08 | 03/31/08 | ||||||||||
Balance, beginning of year | $ | 14,452 | $ | 10,617 | $ | 10,617 | ||||||
Charge-offs: | ||||||||||||
Consumer loans | 116 | 318 | 99 | |||||||||
Commercial, financial & other | 1,108 | 4,304 | 635 | |||||||||
Land development loans — residential property | 2,881 | 1,777 | 6 | |||||||||
Land development loans — non residential property | 197 | — | — | |||||||||
Commercial real estate construction — residential property | 64 | 1,635 | — | |||||||||
Commercial real estate construction — non residential property | 176 | 192 | — | |||||||||
Commercial real estate mortgages | 2,113 | 2,446 | — | |||||||||
Residential real estate mortgages | 25 | 296 | 26 | |||||||||
Recoveries: | ||||||||||||
Consumer loans | 3 | 19 | 7 | |||||||||
Commercial, financial & other | 105 | 117 | 4 | |||||||||
Land development loans — residential property | — | 33 | — | |||||||||
Land development loans — non residential property | — | — | — | |||||||||
Commercial real estate construction — residential property | — | 0 | — | |||||||||
Commercial real estate construction — non residential property | — | 3 | — | |||||||||
Commercial real estate mortgages | 25 | 21 | 1 | |||||||||
Residential real estate mortgages | — | 4 | — | |||||||||
Net charge-offs (recoveries) | 6,547 | 10,771 | 754 | |||||||||
Provision for loan losses | 10,727 | 14,606 | 886 | |||||||||
Balance, end of period | $ | 18,632 | $ | 14,452 | $ | 10,749 | ||||||
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PART I — FINANCIAL INFORMATION
ITEM 2. — | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis are intended to address significant factors affecting the financial condition and results of operations of the Corporation. The discussion provides a more comprehensive review of the financial position and operating results than can be obtained from a reading of the financial statements and footnotes presented elsewhere in this report.
Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Corporation and Bank. Words such as “anticipates”, “believes”, “estimates”, “expects”, “forecasts”, “intends”, “is likely”, “plans”, “projects”, variations of such words and similar expressions are intended to identify such forward- looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. The Corporation undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise.
Future Factors include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national and local economy. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.
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Company Overview
Dearborn Bancorp, Inc. was incorporated as a Michigan business corporation on September 30, 1992. The Corporation was formed to acquire all of the Bank’s issued and outstanding stock and to engage in the business of a bank holding corporation under the Bank Holding Company Act of 1956, as amended (the “Act”).
Community Bank of Dearborn (the “Bank”), a Michigan banking corporation, commenced business on February 28, 1994 in Dearborn, Michigan. On April 30, 2007, Community Bank of Dearborn was renamed Fidelity Bank. Management believes that its new name, Fidelity Bank represents a more accurate portrayal to our customers and prospects of the financial products and services offered by the Bank and the Bank’s market area.
The Bank is the only commercial bank headquartered in Dearborn, Michigan and offers a full line of loan and deposit products and services. The Bank offers excellent customer service to its loan and deposit customers and maintains strong relationships with the communities served by the Bank. The Bank emphasizes strong loan quality, excellent customer service and efficient operations in order to maximize profitability and shareholder value.
Subsequent to the commencement of business in Dearborn, Michigan in 1994, the Bank opened five additional offices in Wayne County, Michigan. Since 2001, the Bank opened two offices in Macomb County, Michigan and in 2003, the Bank opened an office in Oakland County, Michigan.
In 2004, the Corporation acquired the Bank of Washtenaw from Pavillion Bancorp. The Bank of Washtenaw’s three banking offices, all of which are located in Washtenaw County, Michigan were successfully consolidated into the Bank.
In 2007, the Corporation acquired Fidelity Financial Corporation of Michigan (Fidelity), a commercial bank with seven offices in Oakland County, Michigan. The acquisition has significantly expanded the Bank’s presence in Oakland County, Michigan. Management believes that the acquisition will be beneficial to the Bank’s customers and the Corporation’s shareholders. Additionally, the Bank opened a full service banking office in Shelby Township, Michigan on April 30, 2007. The Bank currently operates seventeen banking offices in Wayne, Macomb, Oakland and Washtenaw Counties, Michigan.
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 |
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The date opened, branch location and branch type of each branch is listed on the following page:
Date Opened | Location | Type of office | ||
February 1994 | 22290 Michigan Avenue Dearborn, Michigan 48123 | Full service retail branch with ATM Regional lending center | ||
December 1995 | 24935 West Warren Avenue Dearborn Heights, Michigan 48127 | Full service retail branch | ||
August 1997 | 44623 Five Mile Road Plymouth, Michigan 48170 | Full service retail branch with ATM | ||
May 2001 | 1325 North Canton Center Road Canton, Michigan 48187 | Full service retail branch with ATM | ||
December 2001 | 45000 River Ridge Drive Clinton Township, Michigan 48038 | Regional lending center | ||
November 2002 | 19100 Hall Road Clinton Township, Michigan 48038 | Full service retail branch with ATM | ||
February 2003 | 12820 Fort Street Southgate, Michigan 48195 | Full service retail branch with ATM | ||
May 2003 | 3201 University Drive, Suite 180 Auburn Hills, Michigan 48326 | Full service retail branch | ||
October 2004 | 450 East Michigan Avenue Saline, MI 48176 | Full service retail branch with ATM | ||
October 2004 | 250 West Eisenhower Parkway Ann Arbor, MI 48103 | Full service retail branch with ATM Regional lending certer | ||
October 2004 | 2180 West Stadium Blvd. Ann Arbor, MI 48103 | Full service retail branch with ATM | ||
December 2004 | 1360 Porter Street Dearborn, MI 48123 | Loan production office Regional lending center | ||
January 2007 | 1040 E. Maple Birmingham, MI 48009 | Full service retail branch with ATM Regional lending certer | ||
January 2007 | 3681 W. Maple Birmingham, MI 48301 | Full service retail branch with ATM | ||
January 2007 | 30700 Telegraph Bingham Farms, MI 48025 | Full service retail branch with ATM | ||
January 2007 | 20000 Twelve Mile Road Southfield, MI 48076 | Full service retail branch with ATM | ||
April 2007 | 7755 23 Mile Road Shelby Township, MI 48075 | Full service retail branch with ATM |
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The Corporation has realized substantial asset growth since the formation of the Corporation through December 31, 2008, depending on the economic and competitive environment. Historically, the Bank’s growth has been realized through the growth of the loan portfolio. More specifically, the expansion of our commercial banking department has been a primary element in the Bank’s asset growth through December 31, 2007. During 2008 and continuing into 2009, the Corporation’s funds have been deployed into short-term investments. The Corporation’s growth has been funded primarily by deposits. The Corporation expects to continue its growth in the Metropolitan Detroit market and look for additional acquisitions as they become available.
The Corporation’s earnings depend primarily on net interest income. Management strives to maximize net interest income through monitoring the economic and competitive environment and making appropriate adjustments in the characteristics and pricing of our products and services.
Other factors that contribute significantly to our earnings are the maintenance of 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 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 most industries, many local industries and economies are performing well. The Bank has maintained strong underwriting guidelines and utilizes a diligent loan review process.
The Corporation recorded a net loss of $6,249,000 for the three months ended March 31, 2009. The primary factor affecting net income was the recording of $10,727,000 to the provision for loan loss. The provision for loan loss was due to net charge-offs of $6,547,000 and the continued deterioration in the underlying collateral of the Bank’s non-performing assets. Another significant factor was the cost related to real estate owned, which included defaulted loan expense of $761,000 and write-downs to real estate owned of $354,000 during the three months ended March 31, 2009. These factors are discussed further in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
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Results of Operations
The Corporation reported net loss of ($6,249,000) for the three month period ended March 31, 2009, compared to net income of $676,000 for the three month period ended March 31, 2008, a decrease of $6,925,000. The decrease in net income was primarily due to the increase in the provision for loan loss, the decline in net interest income due to the elevated levels of non-performing loans and the increased costs related to real estate owned.
Net Interest Income
2009 Compared to 2008.As noted on the two charts on the following pages, net interest income for the three month period ended March 31, 2009 was $7,517,000, compared to $8,053,000 for the same period ended March 31, 2008, a decrease of $536,000 or 7%. This decrease was caused primarily by the decreasing spread between interest earning assets and interest bearing liabilities. The Corporation’s interest rate spread was 2.58% for the period ended March 31, 2009, compared to 2.79% for the same period in 2008. The Corporation’s net interest margin was 2.93% for the three month period ended March 31, 2009, compared to 3.40% for the same period in 2008.
Average Balances, Interest Rates and Yields.Net interest income is affected by the difference (“interest rate spread”) between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities and the relative amounts of interest-bearing liabilities and interest-earning assets. When the total of interest-earning assets approximates or exceeds the total of interest-bearing liabilities, any positive interest rate spread will generate net interest income. Financial institutions have traditionally used interest rate spreads as a measure of net interest income. Another indication of an institution’s net interest income is its “net yield on interest-earning assets” or “net interest margin,” which is net interest income divided by average interest-earning assets.
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The following table sets forth certain information relating to the Corporation’s consolidated average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented. During the periods indicated, non-accruing loans, if any, are included in the loan category.
Three months ended March 31, 2009 | Three months ended March 31, 2008 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
(In thousands) | Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest bearing deposits with banks | $ | 45,249 | $ | 94 | 0.84 | % | $ | 180 | $ | 1 | 2.25 | % | ||||||||||||
Federal funds sold | 6,643 | 6 | 0.37 | % | 2,051 | 16 | 3.16 | % | ||||||||||||||||
Securities, available for sale | 67,465 | 256 | 1.54 | % | 11,946 | 108 | 3.67 | % | ||||||||||||||||
Loans | 920,254 | 13,810 | 6.09 | % | 947,407 | 16,174 | 6.92 | % | ||||||||||||||||
Sub-total earning assets | 1,039,611 | 14,166 | 5.53 | % | 961,584 | 16,299 | 6.87 | % | ||||||||||||||||
Other assets | 59,947 | 82,455 | ||||||||||||||||||||||
Total assets | $ | 1,099,558 | $ | 1,044,039 | ||||||||||||||||||||
Liabilities and stockholders’ equity | ||||||||||||||||||||||||
Interest bearing deposits | $ | 842,023 | $ | 5,998 | 2.89 | % | $ | 706,231 | $ | 7,028 | 4.04 | % | ||||||||||||
Other borrowings | 73,326 | 651 | 3.60 | % | 112,593 | 1,218 | 4.39 | % | ||||||||||||||||
Sub-total interest bearing liabilities | 915,349 | 6,649 | 2.95 | % | 818,824 | 8,246 | 4.08 | % | ||||||||||||||||
Non-interest bearing deposits | 78,090 | 82,856 | ||||||||||||||||||||||
Other liabilities | 1,821 | 4,283 | ||||||||||||||||||||||
Stockholders’ equity | 104,298 | �� | 138,076 | |||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,099,558 | $ | 1,044,039 | ||||||||||||||||||||
Net interest income | $ | 7,517 | $ | 8,053 | ||||||||||||||||||||
Net interest rate spread | 2.58 | % | 2.79 | % | ||||||||||||||||||||
Net interest margin on earning assets | 2.93 | % | 3.40 | % | ||||||||||||||||||||
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Rate/Volume Analysis.The following table analyzes net interest income in terms of changes in the volume of interest-earning assets and interest-bearing liabilities and changes in yields and rates. The table reflects the extent to which changes in the interest income and interest expense are attributable to changes in volume (changes in volume multiplied by prior year rate) and changes in rate (changes in rate multiplied by prior year volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately to changes due to volume and changes due to rate.
Three Months Ended March 31, 2009/2008 | ||||||||||||
Average | Average | Net | ||||||||||
(In thousands) | Balance | Rate | Change | |||||||||
Assets | ||||||||||||
Interest bearing deposits with banks | $ | 94 | ($1 | ) | $ | 93 | ||||||
Federal funds sold | 4 | (14 | ) | (10 | ) | |||||||
Investment securities, available for sale | 211 | (63 | ) | 148 | ||||||||
Loans | (391 | ) | (1,973 | ) | (2,364 | ) | ||||||
Total earning assets | ($83 | ) | ($2,050 | ) | ($2,133 | ) | ||||||
Liabilities | ||||||||||||
Interest bearing deposits | $ | 984 | ($2,014 | ) | ($1,030 | ) | ||||||
Other borrowings | (347 | ) | (220 | ) | (567 | ) | ||||||
Total interest bearing liabilities | $ | 637 | ($2,234 | ) | ($1,597 | ) | ||||||
Net interest income | ($536 | ) | ||||||||||
Net interest rate spread | (0.21 | %) | ||||||||||
Net interest margin on earning assets | (0.46 | %) | ||||||||||
Provision for Loan Losses
2009 Compared to 2008.The provision for loan losses was $10,727,000 for the three month period ended March 31, 2009, compared to $886,000 for the same period in 2008, an increase of $9,841,000. The increase is primarily due to net charge-offs of $6,547,000 during the period and the continued deterioration of the underlying collateral of the Bank’s non-performing loans. A primary factor in the continued decline in the underlying value of our collateral and the decision to recognize these charge-offs during the first quarter of 2009 was the accelerating decline in the economic environment in Southeastern Michigan which is heavily impacted by conditions and events that have recently impacted the automotive industry that occurred during the first quarter of 2009 and its impact on the residential real estate market in the Bank’s market area. These conditions have led to an increase in the Bank’s classified assets during the first quarter of 2009. Management has recognized this trend in our analysis of the allowance for loan losses at March 31, 2009.
The provision for loan losses for the three month period ended March 31, 2009 is based on the internal analysis of the adequacy of the allowance for loan losses. The provision for loan losses was based upon management’s assessment of relevant factors, including types and amounts of
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non-performing loans, historical loss experience on such types of loans, and current economic conditions.
Non-interest Income
2009 Compared to 2008.Non-interest income was $328,000 for the three month period ended March 31, 2009, compared to $111,000 for the same period in 2008, an increase of $217,000 or 195% for the period. The increase was primarily due to the sale of two securities for a gain of $195,000. Non interest income for the three months ended March 31, 2009 included $425,000 from the write-down of real estate owned and other assets and loss on the sale of real estate compared to $435,000 during the same period in 2008.
When these transactions related to real estate owned, other assets and securities are excluded, non-interest income for the three months ended March 31, 2009 amounts to $558,000, compared to $546,000 during the same period in 2008, an increase of $12,000 or 2%. This increase is primarily caused by the increase in service charges on deposit accounts.
Non-interest Expense
2009 Compared to 2008.Non-interest expense was $6,511,000 for the three month period ended March 31, 2009, compared to $6,238,000 for the same period in 2008, an increase of $273,000 or 4% for the period. The increase was primarily due to defaulted loan expense which amounted to $761,000 during the three months ended March 31, 2009 compared to $435,000 during the same period in 2008, an increase of $326,000 and the FDIC assessment, which amounted to $348,000 during the three months ended March 31, 2009 compared to $174,000 during the same period in 2008, an increase of $174,000. This increase in defaulted loans expense was primarily due to the payment of property taxes, insurance, legal expenses and maintenance in 2009 for real estate owned.
The largest component of non-interest expense was salaries and employee benefits which amounted to $3,290,000 for the three month period ended March 31, 2009, compared to $3,209,000 for the same period in 2008. As of March 31, 2009, the number of full time equivalent employees was 208 compared to 210 as of March 31, 2008. Salaries and employee benefits are expected to increase marginally as a result of general staff increases.
Income Tax Provision
2009 Compared to 2008.The income tax benefit was ($3,144,000) for the three month period ended March 31, 2009, compared to income tax expense of $364,000 for the same period in 2008, a decrease of $3,508,000 or 964% for the period. The decrease was primarily a result of the decrease in pre-tax income.
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Comparison of Financial Condition at March 31, 2009 and December 31, 2008
Assets.Total assets at March 31, 2009 were $1,073,744,000 compared to $1,121,918,000 at December 31, 2008, a decrease of $48,174,000 or 4%. The decrease was primarily due to decreases in securities, available for sale and loans and partially offset by the increases in cash and cash equivalents and real estate owned.
Federal Funds Sold.Total federal funds sold at March 31, 2009 were $6,841,000 compared to $4,455,000 at December 31, 2008, an increase of $2,386,000 or 45%. The increase in federal funds is the result of normal fluctuations in overnight operating balances that are carried at various correspondent banks.
Interest bearing deposits with banks.Total interest bearing deposits with banks at March 31, 2009 were $53,262,000 compared to $36,876,000 at December 31, 2008, an increase of $16,386,000 or 44%. The increase is primarily due to the Bank’s purchase of $30,000,000 of time deposits from other banks. These time deposits are fully insured and mature in less than eighteen months. Interest bearing deposits with banks also include $23,262,000 of overnight funds that provide the Corporation with an alternate short term investment option. This short term investment is a variable-rate certificate of deposit with the Federal Home Loan Bank of Indianapolis that carries a similar rate of return to federal funds sold.
Mortgage Loans Held for Sale.Total mortgage loans held for sale at March 31, 2009 were $3,009,000 compared to $1,834,000 at December 31, 2008, an increase of $1,175,000 or 64%. This increase was a result of the increase in the level of residential real estate mortgage loans waiting to be purchased by mortgage correspondents.
Securities — Available for Sale.Total securities, available for sale, at March 31, 2009 were $45,368,000 compared to $84,148,000 at December 31, 2008, a decrease of $38,780,000 or 46%. The decrease is the result of the re-deployment of $30,000,000 from securities, available for sale to interest bearing deposits with banks and the sale of two investment securities.
Please refer to Note B of the Notes to Consolidated Financial Statements for the amortized cost and estimated market value of securities, available for sale. The entire portfolio has a net unrealized gain of $94,000 at March 31, 2009. The unrealized gain, net of tax is reflected by an adjustment to stockholders’ equity.
Federal Home Loan Bank Stock.Federal Home Loan Bank stock was valued at $3,614,000 at March 31, 2009 and 2008.
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Loans.Total loans at March 31, 2009 were $900,055,000 compared to $933,269,000 at December 31, 2008, a decrease of $33,214,000 or 4%. The decrease was primarily due to net charge-offs of $6,547,000, the transfer of loans in the amount of $6,456,000 to other real estate and loans paid off during the period. Major categories of loans included in the loan portfolio are as follows (in thousands):
03/31/09 | 12/31/08 | 03/31/08 | ||||||||||
Consumer loans | $ | 31,000 | $ | 31,864 | $ | 34,494 | ||||||
Commercial, financial, & other | 161,138 | 164,740 | 169,659 | |||||||||
Land development loans — residential property | 50,028 | 54,323 | 61,638 | |||||||||
Land development loans — non residential property | 15,914 | 16,094 | 16,372 | |||||||||
Commercial real estate construction — residential property | 15,687 | 17,296 | 26,004 | |||||||||
Commercial real estate construction — non residential property | 25,716 | 25,322 | 38,885 | |||||||||
Commercial real estate mortgages | 548,692 | 571,204 | 543,778 | |||||||||
Residential real estate mortgages | 51,880 | 52,426 | 57,097 | |||||||||
900,055 | 933,269 | 947,927 | ||||||||||
Allowance for loan losses | (18,632 | ) | (14,452 | ) | (10,749 | ) | ||||||
$ | 881,423 | $ | 918,817 | $ | 937,178 | |||||||
The following is a summary of non-performing assets and problems loans (in thousands):
03/31/09 | 12/31/08 | 03/31/08 | ||||||||||
Troubled debt restructuring | 19,506 | 17,765 | 8,710 | |||||||||
Over 90 days past due and still accruing | — | 450 | 9,257 | |||||||||
Non-accrual loans | 55,148 | 51,708 | 17,406 | |||||||||
Total non-performing loans | 74,654 | 69,923 | 35,373 | |||||||||
Real estate owned | 11,737 | 9,657 | 6,183 | |||||||||
Real estate in redemption | 2,887 | — | — | |||||||||
Other repossessed assets | — | — | — | |||||||||
Other non-performing assets | 14,624 | 9,657 | 6,183 | |||||||||
Total non-performing assets | $ | 89,278 | $ | 79,580 | $ | 41,556 | ||||||
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Non-accrual loans at March 31, 2009 were $55,148,000, compared to $51,708,000 at December 31, 2008. The increase in non-accrual loans during the period was primarily due to the downgrading of 28 loans to non-accrual status for $18,100,000 and partially offset by net charge- offs of $6,547,000 and the transfer of 23 loans to other real estate for $6,455,000. The Bank’s impairment analysis indicated that the loans downgraded to non-accrual status during the period required a specific allowance in the allowance for loan losses of $452,000 at March 31, 2009.
The distribution of non-accrual loans by loan type (in thousands) is as follows:
Number of | ||||||||
Loans | Balance | |||||||
Consumer loans | 12 | $ | 1,128 | |||||
Commercial, financial, & other | 38 | 5,669 | ||||||
Land development loans — residential property | 12 | 11,541 | ||||||
Land development loans — non residential property | 2 | 7,041 | ||||||
Commercial real estate construction — residential property | 8 | 3,957 | ||||||
Commercial real estate construction — non residential property | 3 | 6,719 | ||||||
Commercial real estate mortgages | 36 | 18,112 | ||||||
Residential real estate mortgages | 13 | 981 | ||||||
Total non-accrual loans | 124 | $ | 55,148 | |||||
Loans that qualify as troubled debt restructuring amounted to $19,506,000 and $17,764,000 at March 31, 2009 and December 31, 2008, respectively. These loans qualified as troubled debt restructuring primarily due to the temporary change in payment type from principal and interest to interest only or the renewal of interest reserves when current loan to value ratios were outside of our loan policy. All loans categorized as troubled debt restructuring at March 31, 2009 are in compliance with their modified terms. The specific allowance of loans categorized as troubled debt restructuring was $0 and $375,000 at March 31, 2009 and December 31, 2008, respectively.
Allowance for Loan Losses.The allowance for loan losses was $18,632,000 at March 31, 2009 compared to $14,452,000 at December 31, 2008, an increase of $4,180,000 or 29%. The increase was primarily due to net charge-offs of $6,547,000 and the continuing deterioration of the underlying collateral of the Bank’s non-performing loans. A primary factor in the continued decline in the underlying value of our collateral and the decision to recognize these charge-offs during the first quarter of 2009 was the accelerating decline in the economic environment in Southeastern Michigan which is heavily impacted by conditions and events that have recently impacted the automotive industry during the first quarter of 2009 and its impact on the residential real estate market in the Bank’s market area. These conditions have led to an increase in the Bank’s classified assets during the first quarter of 2009. Management has recognized this trend in our analysis of the allowance for loan losses at March 31, 2009. The allowance for loan losses was based upon management’s assessment of relevant factors, including loan growth, types and amounts of non-performing loans, historical and anticipated loss experience on such types of loans, and current economic conditions.
During the first quarter of 2009, the Corporation recognized $4,960,000 in charge-offs for regulatory accounting purposes only. Regulatory requirements dictate that on impaired loans when the practical expedient of estimated collateral values (net of estimated costs to sell) are utilized in establishing impairment reserves, those impairment reserves must be immediately charged off. The Corporation’s policy for financial reporting purposes is to establish a valuation
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reserve on impaired credits in accordance with generally accepted accounting principles and the Corporation records a charge-off on impaired loans once the loss has been confirmed. Related to the $4,960,000 recognized in charge-offs for regulatory purposes, the Bank has entered into forbearance agreements with these borrowers and is pursuing other methods of collections on these loans. While a valuation reserve has been recorded on these credits based upon the practical expedient of the estimated collateral value, net of estimated costs to sell, the Corporation does not believe that the loss has been confirmed and therefore has not charged off these amounts.
The following is an analysis of the allowance for loan losses (in thousands):
Three Months Ended | Year Ended | Three Months Ended | ||||||||||
03/31/09 | 12/31/08 | 03/31/08 | ||||||||||
Balance, beginning of year | $ | 14,452 | $ | 10,617 | $ | 10,617 | ||||||
Charge-offs: | ||||||||||||
Consumer loans | 116 | 318 | 99 | |||||||||
Commercial, financial & other | 1,108 | 4,304 | 635 | |||||||||
Land development loans — residential property | 2,881 | 1,777 | 6 | |||||||||
Land development loans — non residential property | 197 | — | — | |||||||||
Commercial real estate construction — residential property | 64 | 1,635 | — | |||||||||
Commercial real estate construction — non residential property | 176 | 192 | — | |||||||||
Commercial real estate mortgages | 2,113 | 2,446 | — | |||||||||
Residential real estate mortgages | 25 | 296 | 26 | |||||||||
Recoveries: | ||||||||||||
Consumer loans | 3 | 19 | 7 | |||||||||
Commercial, financial & other | 105 | 117 | 4 | |||||||||
Land development loans — residential property | — | 33 | — | |||||||||
Land development loans — non residential property | — | — | — | |||||||||
Commercial real estate construction — residential property | — | 0 | — | |||||||||
Commercial real estate construction — non residential property | — | 3 | — | |||||||||
Commercial real estate mortgages | 25 | 21 | 1 | |||||||||
Residential real estate mortgages | — | 4 | — | |||||||||
Net charge-offs (recoveries) | 6,547 | 10,771 | 754 | |||||||||
Provision for loan losses | 10,727 | 14,606 | 886 | |||||||||
Balance, end of period | $ | 18,632 | $ | 14,452 | $ | 10,749 | ||||||
Allowance to total loans | 2.07 | % | 1.55 | % | 1.13 | % | ||||||
Allowance to nonperforming assets | 20.87 | % | 18.16 | % | 25.87 | % | ||||||
Net charge-offs to average loans | 0.71 | % | 1.14 | % | 0.08 | % | ||||||
Premises and Equipment.Bank premises and equipment at March 31, 2009 were $21,001,000 compared to $21,272,000 at December 31, 2008, a decrease of $271,000 or 1%. The decrease is primarily due to depreciation during the period.
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Other Real Estate. Other real estate at March 31, 2009 was $14,624,000 compared to $9,657,000 at December 31, 2008, an increase of $4,967,000 or 51%. The distribution of other real estate by property type is listed below (in thousands):
Number of | ||||||||
Property Type | Properties | Amount | ||||||
Single Family Homes | 39 | $ | 5,606 | |||||
Condominium | 2 | 1,065 | ||||||
Vacant Land | 7 | 4,698 | ||||||
Commercial | 4 | 1,341 | ||||||
Office/Retail | 3 | 1,914 | ||||||
Total | 55 | $ | 14,624 | |||||
Other real estate is comprised of real estate owned of $11,738,000 and real estate in redemption status of $2,886,000.
Other intangible assets.Other intangible assets were $4,394,000 at March 31, 2009 compared to $4,592,000 at December 31, 2008, a decrease of $198,000 or 7%. The Bank has intangible assets for the estimated value of core deposit accounts and borrower relationships acquired in the acquisition of the Bank of Washtenaw and Fidelity. The intangible values represent the present value of the net revenue streams attributable to these intangibles. The gross carrying amount and accumulated amortization of these intangible assets at March 31, 2009 was as follows (in thousands):
Gross | ||||||||
Carrying | Accumulated | |||||||
Amount | Amortization | |||||||
Core deposit intangible from acquisition of: | ||||||||
Bank of Washtenaw | $ | 264 | $ | 11 | ||||
Fidelity Financial Corporation of Michigan | 2,493 | 104 | ||||||
Total core deposit intangible | $ | 2,757 | $ | 115 | ||||
Borrower relationship intangible from acquisition of : | ||||||||
Bank of Washtenaw | $ | 318 | $ | 14 | ||||
Fidelity Financial Corporation of Michigan | 1,517 | 69 | ||||||
Total borrower relationship intangible | $ | 1,835 | $ | 83 | ||||
Total intangible assets | $ | 4,592 | $ | 198 | ||||
The core deposit intangible is being amortized over a period of eleven years and the borrower relationship intangible is being amortized over a period of ten years. At March 31, 2009, the core deposit intangible and borrower relationship intangible amounted to $2,642,000 and $1,752,000, respectively.
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Accrued Interest Receivable.Accrued interest receivable at March 31, 2009 was $3,920,000 compared to $3,499,000 at December 31, 2008, an increase of $421,000 or 12%. The increase was primarily due to the increase in securities, available for sale and interest bearing deposits with banks.
Other Assets. Other assets at March 31, 2009 were $22,707,000 compared to $21,483,000 at December 31, 2008, an increase of $1,224,000 or 6%. The increase was primarily due to changes in deferred tax assets.
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Deposits.Total deposits at March 31, 2009 were $907,579,000 compared to $938,395,000 at December 31, 2008, an decrease of $30,816,000 or 3%. The following is a summary of the distribution of deposits (in thousands):
03/31/09 | 12/31/08 | 03/31/08 | ||||||||||
Non-interest bearing: | ||||||||||||
Demand | $ | 80,624 | $ | 81,317 | $ | 80,725 | ||||||
Interest bearing: | ||||||||||||
Checking | $ | 96,491 | $ | 103,774 | $ | 66,782 | ||||||
Money market | 171,426 | 163,611 | 98,733 | |||||||||
Savings | 56,389 | 54,164 | 53,986 | |||||||||
Time, under $100,000 | 215,508 | 211,109 | 165,840 | |||||||||
Time, $100,000 and over | 287,141 | 324,420 | 303,151 | |||||||||
826,955 | 857,078 | 688,492 | ||||||||||
Total deposits | $ | 907,579 | $ | 938,395 | $ | 769,217 | ||||||
The decrease in deposits was primarily due to the decrease in municipal and brokered time deposits during a period of decreasing interest rates. Management continues to implement a strategy to change the mix of the deposit portfolio by focusing more heavily on transaction accounts. The Bank recently completed a weeklong celebration in March 2009 that highlighted the Bank’s Anniversary and the promotion of a demand deposit product. Management expects deposits to decline marginally during the remainder of 2009.
The Bank has enacted a strategy to utilize retail deposits as the primary funding for the Bank’s growth. Public funds and secured borrowings are also utilized as funding sources. The mix of these sources is determined by the Bank’s Asset and Liability Committee. The Bank has designated a public funds officer to coordinate and manage efforts to utilize public funds and brokered deposits. Public funds consist of interest checking and time deposits of local governmental units. They are the result of strong relationships between the Bank and the communities in the Bank’s marketing area and are considered by the Bank to be core deposits. The following is a summary of the distribution of municipal deposits (in thousands):
03/31/09 | 12/31/08 | 03/31/08 | ||||||||||
Interest bearing checking | $ | 3,990 | $ | 4,283 | $ | 2,043 | ||||||
Time, $100,000 and over | 25,015 | 38,999 | 116,772 | |||||||||
Total municipal deposits | $ | 29,005 | $ | 43,282 | $ | 118,815 | ||||||
Brokered deposits are included in the Time, $100,000 and over category. Brokered deposits were $65,020,000, $97,997,000 and $27,137,000 at March 31, 2009, December 31, 2008 and March 31, 2008, respectively.
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Federal Funds Purchased. Federal funds purchased were $0 at March 31, 2009 and December 31, 2008.
Securities Sold Under Agreement to Repurchase. Securities sold under agreements to repurchase at March 31, 2009 were $2,268,000 compared to $2,461,000 at December 31, 2008, a decrease of $193,000 or 8%. These repurchase agreements are secured by securities held by the Bank.
Federal Home Loan Bank Advances. Federal Home Loan Bank advances were $54,955,000 at March 31, 2009 compared to $65,019,000 at December 31, 2008, a decrease of $10,064,000 or 16%. The decrease was due to the maturity of a FHLB advance during the period.
Accrued Interest Payable. Accrued interest payable at March 31, 2009 was $1,372,000 compared to $1,695,000 at December 31, 2008, a decrease of $323,000 or 19%. The decrease was primarily due the decreasing volume and cost of deposits.
Other Liabilities. Other liabilities at March 31, 2009 were $606,000 compared to $1,037,000 at December 31, 2008, a decrease of $431,000 or 42%. The decrease was primarily due to the decrease in expenses payable during the period.
Subordinated Debentures. Subordinated debentures were $10,000,000 at March 31, 2009 and December 31, 2008.On December 19, 2002, the Corporation issued $10,000,000 of floating rate obligated mandatory redeemable securities through a special purpose entity as part of a pooled offering. The securities have a term of thirty years. The Corporation may redeem the securities after five years at face value. They are considered to be Tier 1 capital for regulatory capital purposes. The funds from the issue of these securities were invested into securities available for sale until they can be invested into the Bank subsidiary to allow for additional growth. Debt issue costs of $300,000 have been entirely amortized.
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Capital
Stockholders’ equity at March 31, 2009 was $96,964,000 compared to $103,311,000 as of December 31, 2008, a decrease of $6,347,000 or 6%. The decrease was due to the net loss recorded during the period.
The following is a presentation of the Corporation’s and Bank’s regulatory capital ratios (in thousands):
Minimum | ||||||||||||||||||||||||
To Be Well Capitalized | ||||||||||||||||||||||||
Minimum for Capital | Under Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of March 31, 2009 | ||||||||||||||||||||||||
Total capital (to risk weighted assets) | ||||||||||||||||||||||||
Consolidated | 99,414 | 10.49 | % | 75,785 | 8.00 | % | N/A | N/A | ||||||||||||||||
Bank | 97,279 | 10.29 | % | 75,620 | 8.00 | % | 94,525 | 10.00 | % | |||||||||||||||
Tier 1 capital (to risk weighted assets) | ||||||||||||||||||||||||
Consolidated | 87,575 | 9.23 | % | 37,933 | 4.00 | % | N/A | N/A | ||||||||||||||||
Bank | 85,440 | 9.04 | % | 37,810 | 4.00 | % | 56,715 | 6.00 | % | |||||||||||||||
Tier 1 capital (to average assets) | ||||||||||||||||||||||||
Consolidated | 87,575 | 8.10 | % | 43,263 | 4.00 | % | N/A | N/A | ||||||||||||||||
Bank | 85,440 | 7.93 | % | 43,122 | 4.00 | % | 53,902 | 5.00 | % | |||||||||||||||
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 | % |
Based on the respective regulatory capital ratios at March 31, 2009 and December 31, 2008, the Corporation and Bank are considered well capitalized.
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PART I — FINANCIAL INFORMATION
ITEM 3. — | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Sensitivity Analysis.The Corporation has sought to manage its exposure to changes in interest rates by matching the effective maturities or repricing characteristics of the Corporation’s interest-earning assets and interest-bearing liabilities. The matching of the assets and liabilities may be analyzed by examining the extent to which the assets and liabilities are interest rate sensitive and by monitoring the expected effects of interest rate changes on net interest income.
An asset or liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. If the Corporation’s assets mature or reprice more quickly or to a greater extent that its liabilities, the Corporation’s net portfolio value and net interest income would tend to increase during periods of rising interest rates but decrease during periods of falling interest rates. If the Corporation’s assets mature or reprice more slowly or to a lesser extent than its liabilities, its net portfolio value and net interest income would tend to decrease during periods of rising interest rates but increase during periods of falling interest rates.
The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution’s interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity “gap” is the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities, and is considered negative when the amount of interest rate sensitive liabilities exceed the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would be expected to adversely affect net interest income while a positive gap would be expected to result in an increase in net interest income, while conversely during a period of declining interest rates, a negative gap would be expected to result in an increase in net interest income and a positive gap would be expected to adversely affect net interest income.
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Different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, and thus changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category. Additionally, the gap analysis does not consider the many factors as banking interest rates move. While the interest rate sensitivity gap is a useful measurement and contributes toward effective asset and liability management, it is difficult to predict the effect of changing interest rates solely on that measure, without accounting for alterations in the maturity or repricing characteristics of the balance sheet that occur during changes in market interest rates.
During periods of rising interest rates, the Corporation’s assets tend to have prepayments that are slower than those in an interest rate sensitivity gap and would increase the negative gap position. Conversely, during a period of declining interest rates, the Corporation’s assets would tend to prepay faster than originally expected thus decreasing the negative gap position. In addition, some of the Corporation’s assets, such as adjustable rate mortgages, have caps on the amount by which their interest rates can change in any single period, and therefore may not reprice as quickly as liabilities in the same maturity category.
The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at March 31, 2009, 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 | $ | 6,841 | $ | — | $ | — | $ | — | $ | 6,841 | ||||||||||
Interest bearing deposits with Banks | 28,083 | 19,742 | 5,437 | — | 53,262 | |||||||||||||||
Mortgage loans held for sale | 3,009 | — | — | — | 3,009 | |||||||||||||||
Securities available for sale | 2,000 | 2,114 | 40,968 | 286 | 45,368 | |||||||||||||||
Federal Home Loan Bank stock | 3,614 | — | — | — | 3,614 | |||||||||||||||
Total loans, net of non-accrual | 209,044 | 92,525 | 505,952 | 40,567 | 848,088 | |||||||||||||||
Total earning assets | 252,591 | 114,381 | 552,357 | 40,853 | 960,182 | |||||||||||||||
Interest bearing liabilities | ||||||||||||||||||||
Total interest bearing deposits | 428,892 | 366,961 | 30,843 | 259 | 826,955 | |||||||||||||||
Federal Home Loan Bank advances | — | 25,000 | 29,955 | — | 54,955 | |||||||||||||||
Other Borrowings | 2,268 | — | — | — | 2,268 | |||||||||||||||
Subordinated debentures | 10,000 | — | — | — | 10,000 | |||||||||||||||
Total interest bearing liabilities | 441,160 | 391,961 | 60,798 | 259 | 894,178 | |||||||||||||||
Net asset (liability) funding gap | (188,569 | ) | (277,580 | ) | 491,559 | 40,594 | $ | 66,004 | ||||||||||||
Cumulative net asset (liability) funding gap | ($188,569 | ) | ($466,149 | ) | $ | 25,410 | $ | 66,004 | ||||||||||||
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Liquidity.Liquidity refers to readily available funds to meet the needs of borrowers and depositors. Levels of liquidity are closely monitored in conjunction with loan funding requirements and deposit outflows. Adequate liquidity protects institutions from raising funds under duress at excessive expense and provides a necessary cushion for occasional unpredictable aberrations in demand. While adequate liquidity is imperative, excessive liquidity in lower yielding cash investments or other easily marketable assets reduces potential interest income. Thus, an appropriate balance must be maintained to protect the institution and at the same time, prudently maximize income opportunities. Sources of liquidity from both assets and liabilities include federal funds sold, securities available for sale, loan repayments, core deposits, Federal Home Loan Bank advances and a federal funds purchase credit facility. Liquidity is continually measured and discussed. When liquidity and funding projections indicate that liquidity levels are not adequate to meet the current or projected liquidity needs of the Bank, management makes adjustments to improve its liquidity position.
The Corporation reduced its reliance on federal funds lines of credit as a primary source of funds during the second and third quarters of 2008. During the third quarter of 2008, the credit environment became very unstable and the ability to use unsecured federal funds lines of credit became very limited. As the Corporation had already reduced its reliance upon these lines of credit as a funding source, the Corporation was not significantly affected. However, this situation has affected management’s process of maintaining adequate levels of liquidity. As this source of overnight funding has decreased significantly, management has increased the amount of cash and cash equivalents in order to maintain an adequate level of liquidity. Management has also increased the amount of securities, available for sale and interest bearing deposits with banks that can be utilized as collateral against short-term borrowings. The increase in the amount of cash and cash equivalents and securities, available for sale is funded primarily with deposits and decreases in loans.
The Corporation is currently considering alternatives to supplement liquidity levels at the Corporation’s holding company, which have decreased primarily due to the Corporation’s repurchase of common stock. Two of the alternatives currently under consideration are the deferral of interest payments on the Corporation’s subordinated debentures and the financing or sale/leaseback of two office buildings that are owned by the holding company.
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The following tables provide information about the Bank’s contractual obligations and commitments at March 31, 2009 (in thousands):
Contractual Obligations
Payments Due By Period | ||||||||||||||||||||
Less Than | 1-3 | 3-5 | Over 5 | |||||||||||||||||
1 Year | Years | Years | Years | Total | ||||||||||||||||
Securities sold under agreements to repurchase | $ | 2,268 | $ | — | $ | — | $ | — | $ | 2,268 | ||||||||||
Certificates of deposit | 471,546 | 23,595 | 7,248 | 259 | 502,648 | |||||||||||||||
Long-term borrowings | 25,000 | 19,684 | 10,271 | — | 54,955 | |||||||||||||||
Lease commitments | 784 | 894 | 110 | — | 1,788 | |||||||||||||||
Subordinated debentures | — | — | — | 10,000 | 10,000 | |||||||||||||||
Totals | $ | 499,598 | $ | 44,173 | $ | 17,629 | $ | 10,259 | $ | 571,659 | ||||||||||
Unused Loan Commitments and Letters of Credit | ||||||||||||||||||||
Amount Of Commitment Expiration Per Period | ||||||||||||||||||||
Less Than | 1-3 | 3-5 | Over 5 | |||||||||||||||||
1 Year | Years | Years | Years | Total | ||||||||||||||||
Unused loan commitments | $ | 75,449 | $ | 7,475 | $ | 8,481 | $ | 11,955 | $ | 103,360 | ||||||||||
Standby letters of credit | 1,518 | 327 | 2,000 | — | 3,845 | |||||||||||||||
Totals | $ | 76,967 | $ | 7,802 | $ | 10,481 | $ | 11,955 | $ | 107,205 | ||||||||||
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Item 4.Controls and Procedures
Disclosure Controls and Procedures—As of the end of the period covered by this report, the registrant carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures. Based on the review of the disclosure controls of the registrant, the Chief Executive Officer and the Chief Financial Officer have concluded that the registrant’s disclosure controls and procedures were effective as of March 31, 2009.
Internal Controls Over Financial Reporting — There has been no change in the registrant’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting.
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DEARBORN BANCORP, INC. AND SUBSIDIARY
FORM 10-Q (continued)
FORM 10-Q (continued)
PART II — OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS IN FORM 8-K.
(a) | Exhibits |
Exhibit 31.1 | CEO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 31.2 | CFO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 32.1 | CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 32.2 | CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(b) | A Form 8-K Report, dated January 20, 2009 was filed during the quarter ended March 31, 2009. |
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DEARBORN BANCORP, INC.
FORM 10-Q (continued)
FORM 10-Q (continued)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dearborn Bancorp, Inc. (Registrant) | ||||
/s/ John E. Demmer | ||||
John E. Demmer | ||||
Chairman | ||||
/s/ Michael J. Ross | ||||
Michael J. Ross | ||||
President and Chief Executive Officer | ||||
/s/ Jeffrey L. Karafa | ||||
Jeffrey L. Karafa | ||||
Treasurer and Chief Financial Officer | ||||
Date: May 14, 2009
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