SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly period ended March 31, 1998.
---------------
Commission file number 000-24478.
DEARBORN BANCORP, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-3073622
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22290 Michigan Avenue, Dearborn, MI 48123-2247
--------------------------------------------------
(Address of principal executive office) (Zip Code)
(313) 274-1000
--------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes__X___ No ______
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of April 30, 1997.
Class Shares Outstanding
----- ------------------
Common Stock 2,424,924
DEARBORN BANCORP, INC.
INDEX
Part I. Financial Information:
Item 1. Financial Statements
The following consolidated financial statements of Dearborn
Bancorp, Inc. and its subsidiary included in this report are: Page
Consolidated Balance Sheets - March 31, 1998,
December 31, 1997 and March 31, 1997 3
Consolidated Statements of Income - For the Three
Months Ended March 31, 1998 and 1997 4
Consolidated Statements of Comprehensive Income - For the
Three Months Ended March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows - For the Three
Months Ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion of Results of Operations and Analysis
of Financial Condition, Liquidity and Capital 8-18
Part II. Other Information:
Pursuant to SEC rules and regulations, the following item(s) are
included with the Form 10-Q Report:
Item 6. Exhibits and Reports on Form 8-K 19
Pursuant to SEC rules and regulations, the following items are
omitted from this Form 10-Q as inapplicable or to which the answer is
negative:
Item 1. Legal Proceedings
Item 2. Changes in the Rights of the Corporation's Security Holders
Item 3. Defaults by the Corporation on its Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
SIGNATURES 20
2
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, expect share data) 03/31/98 12/31/97 03/31/97
(unaudited) (audited) (unaudited)
----------- ---------- -----------
ASSETS
Cash and cash equivalents
Cash and due from banks $ 2,226 $ 1,406 $ 1,229
Federal funds sold 16,239 254 1,600
--------- --------- ---------
Total cash and cash equivalents 18,465 1,660 2,829
Mortgage loans held for sale 1,448 347 334
Investment securities, available for sale 28,334 29,780 19,389
Loans
Loans 54,170 52,139 40,119
Allowance for possible credit losses (541) (522) (405)
--------- --------- ---------
Net loans 53,629 51,617 39,714
Bank premises and equipment, net 2,265 2,296 2,057
Accrued interest receivable 538 723 637
Other assets 300 230 122
--------- --------- ---------
Total assets $ 104,979 $ 86,653 $ 65,082
========= ========= =========
LIABILITIES
Deposits
Non-interest bearing deposits $ 12,288 $ 8,587 $ 7,806
Interest bearing deposits 82,768 66,810 48,268
--------- --------- ---------
Total deposits 95,056 75,397 56,074
Other liabilities
Federal funds purchased -- 1,500 --
Mortgage payable 532 537 549
Accrued interest payable 356 310 151
Other liabilities 137 157 104
--------- --------- ---------
Total liabilities 96,081 77,901 56,878
STOCKHOLDERS' EQUITY
Common stock - 3,000,000 shares authorized,
1,044,924 shares outstanding in
1998 and 1997 10,476 10,506 9,272
Accumulated deficit (1,514) (1,689) (952)
Net unrealized (loss) on securities
available for sale (64) (65) (116)
--------- --------- ---------
Total stockholders' equity 8,898 8,752 8,204
--------- --------- ---------
Total liabilities and
stockholders' equity $ 104,979 $ 86,653 $ 65,082
========= ========= =========
<FN>
The accompanying notes are an integral part of these consolidated statements.
3
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(In thousands, except share data) Three Months Ended
03/31/98 03/31/97
-------- --------
Interest income
Interest on loans $ 1,205 $ 869
Interest on investment securities,
available for sale 375 229
Interest on federal funds and deposits
with banks 115 25
----------- -----------
Total interest income 1,695 1,123
Interest expense
Interest on deposits 976 578
Interest on other liabilities 12 11
----------- -----------
Total interest expense 988 589
Net interest income 707 534
Provision for possible credit losses 22 39
----------- -----------
Net interest income after provision for possible
credit losses 685 495
----------- -----------
Non-interest income
Service charges on deposit accounts 31 30
Fees for other services to customers 7 7
Gain on the sale of loans 27 34
Gain on the sale investment securities 13 --
Other income 3 1
----------- -----------
Total non-interest income 81 72
Non-interest expenses
Salaries and employee benefits 362 281
Occupancy and equipment expense 96 51
Advertising and marketing 23 30
Stationery and supplies 25 17
Professional services 36 17
Data processing 28 20
FDIC insurance premiums 2 --
Other operating expenses 69 63
----------- -----------
Total non-interest expenses 641 479
----------- -----------
Income before income tax benefit 125 88
Income tax benefit (50) (25)
----------- -----------
Net income $ 175 $ 113
=========== ===========
Per share data:
Net income - basic and diluted $ 0.17 $ 0.11
Weighted average number of shares outstanding -
basic 1,044,924 1,044,924
Weighted average number of shares outstanding -
diluted 1,060,861 1,055,861
<FN>
The accompanying notes are an integral part of these consolidated statements.
4
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(In thousands) Three Months Ended
03/31/98 03/31/97
-------- --------
Net income $ 175 $ 113
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising
during period 14 (98)
Less: reclassification adjustment for
gains included in net income (13) --
----- -----
Other comprehensive income 1 (98)
----- -----
Comprehensive income $ 176 $ 15
===== =====
<FN>
The accompanying notes are an integral part of these consolidated statements.
5
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands) Three Months Ended
03/31/98 03/31/97
-------- --------
Cash flows from operating activities
Interest and fees received $ 1,921 $ 830
Interest paid (942) (565)
Proceeds from sale of mortgages held for sale 3,160 2,654
Origination of mortgages held for sale (4,234) (2,651)
Cash paid to suppliers and employees (631) (607)
-------- --------
Net cash (used in) operating activities (726) (339)
Cash flows from investing activities
Proceeds from maturities of securities available
for sale 15,350 3,000
Proceeds from sales of securities available for
sale 6,015 595
Purchases of securities available for sale (19,900) (12,592)
Increase in loans, net of payments received (2,034) (3,856)
Purchases of property and equipment (24) (11)
-------- --------
Net cash used in investing activities (593) (12,864)
Cash flows from financing activities
Net increase in non-interest bearing deposits 3,701 223
Net increase in interest bearing deposits 15,958 8,388
Decrease in federal funds purchased (1,500) --
Principal payments on mortgage payable (5) (5)
Common stock offerings costs (30) --
-------- --------
Net cash provided by financing activities 18,124 8,606
Increase (decrease) in cash and cash equivalents 16,805 (4,597)
Cash and cash equivalents at the beginning of the period 1,660 7,426
-------- --------
Cash and cash equivalents at the end of the period $ 18,465 $ 2,829
======== ========
Reconciliation of net income to net cash used in operating
activities
Net income $ 175 $ 113
Adjustments to reconcile net income to net cash
used in operating activities
Provision for possible credit losses 22 39
Depreciation and amortization expense 56 35
Accretion of discount on investment
securities (6) (2)
Amortization of premium on investment
securities -- 5
Gain on sale of investment securities (13) --
(Increase) in mortgages held for sale (1,101) (31)
(Increase) decrease in interest
receivable 185 (331)
Increase in interest payable 46 24
(Increase) in other assets (70) (30)
(Decrease) in other liabilities (20) (161)
-------- --------
Net cash (used in) operating activities $ (726) $ (339)
======== ========
<FN>
The accompanying notes are an integral part of these consolidated statements.
6
DEARBORN BANCORP, INC.
FORM 10-Q (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting and Reporting Policies
The financial statements of Dearborn Bancorp, Inc. (the
"Corporation") include the consolidation of its only subsidiary,
Community Bank of Dearborn (the "Bank"). The accounting and reporting
policies of the Corporation are in accordance with generally accepted
accounting principles and conform to practice within the banking
industry.
The unaudited financial statements of the Corporation for the three
month periods ended March 31, 1998 and 1997 reflect all adjustments,
consisting of normal recurring items which are, in the opinion of
management, necessary to present a fair statement of the results for
the interim period. The operating results for the quarter are not
necessarily indicative of results of operations for the entire year.
The consolidated financial statements 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 financial
statements prepared in accordance with generally accepted accounting
principles 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 1997 Annual Report to Stockholders.
B. Adoption of New Accounting Standards
On January 1, 1998, the Corporation adopted Financial Accounting
Standards Board (the "FASB") issued Statement No. 130, "Reporting of
Comprehensive Income" ("SFAS 130"), which establishes standards for
reporting and display of comprehensive income and its components
(revenues, expense, gains, and losses) in a full set of financial
statements. This statement also requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
7
DEARBORN BANCORP, INC.
FORM 10-Q (continued)
PART 1 - FINANCIAL INFORMATION
- --------------------------------
ITEM 2. - MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS AND
ANALYSIS OF FINANCIAL CONDITION
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.
Certain information contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations may be deemed to be
forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995 and are subject to the Act's safe harbor
provisions. These statements are based on current expectations and involve a
number of risks and uncertainties. Active results could differ materially and
adversely from those described in the forward-looking statements as a result
of various factors outside the control of the Corporation, including but not
limited to the following: the risk of non-payment of loans, changes in
prevailing economic conditions causing declines in real estate market values,
rapid changes in interest rates and the monetary and fiscal policies of the
federal government, and strong competition for deposits, loans and other
financial services from competitors.
General
The Corporation was formed in 1992 and the Bank was formed in 1993. Principal
operations of the Bank commenced on February 28, 1994 when the Bank opened
for business at its main office, located at 22290 Michigan Avenue, Dearborn,
Michigan. On December 20, 1995, the Bank opened its second office, located at
24935 West Warren Avenue, Dearborn Heights, Michigan. On August 11, 1997, the
Bank opened its third office, located at 44623 Five Mile Road, Plymouth
Township, Michigan.
8
Results of Operations
The Corporation reported net income of $175,000 for the three month period
ended March 31, 1998 compared to net income of $113,000 for the three month
period ended March 31, 1997. The improvement was primarily a factor of growth
in the volume of investments, loans and deposits and the corresponding net
interest income associated with the increased volumes.
Net Interest Income
1998 Compared to 1997. Net interest income for the three month period ended
March 31, 1998 was $707,000 compared to $534,000 for the same period ended
March 31, 1997, an increase of $173,000 or 32%. This increase was caused
primarily by an increase in average earning assets of $29.5 million between
the periods while interest-bearing liabilities grew by $27.0 million. At the
same time the Corporation's interest rate spread decreased to 2.43% in 1998
from 2.76% in 1997. The Corporation's net interest margin also decreased in
1998 to 3.33% from 3.85% in 1997. However, the decreases in net interest
spread and net interest margin were offset by increases in the volume of net
earning assets. The Corporation's decrease in interest rate spread and net
interest margin was a direct result of aggressive time deposit gathering at
premium rates and the direct reinvestment of those funds into investment
securities with similar interest rates until the funds could be redeployed
into quality loans with higher yields.
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.
9
The following table sets forth certain information relating to the
Corporation's consolidated average interest-earning assets and
interest-bearing liabilities and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs
are derived by dividing income or expense by the average daily balance of
assets or liabilities, respectively, for the periods presented. During the
periods indicated, non-accruing loans, if any, are included in the net loan
category.
Three months ended Three months ended
March 31, 1998 March 31, 1997
------------------------------ ----------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Assets
Federal funds sold and
interest bearing deposits
with banks $ 8,275 $ 115 5.56% $ 1,801 $ 25 5.55%
Investment securities,
available for sale 23,867 375 6.28% 15,484 229 5.92%
Loans 52,849 1,205 9.12% 38,229 869 9.09%
------- ------- ---- ------- ------- ----
Sub-total earning
assets 84,991 1,695 7.98% 55,514 1,123 8.09%
Other assets 6,374 4,254
------- -------
Total assets $91,365 $59,768
Liabilities and stockholders' equity
Interest bearing deposits $70,614 $ 976 5.53% $43,616 $ 578 5.30%
Other borrowings 601 12 7.99% 558 11 7.89%
------- ------- ---- ------- ------- ----
Sub-total interest
bearing liabilities 71,215 988 5.55% 44,174 589 5.33%
Non-interest bearing deposits 10,372 7,103
Other liabilities 449 248
Stockholders' equity 9,329 8,243
------- ------
Total liabilities
and stockholders'
equity $91,365 $59,768
======= =======
Net interest income $ 707 $ 534
======= =======
Net interest rate
spread 2.43% 2.76%
==== =====
Net interest
margin on earning assets 3.33% 3.85%
==== =====
10
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.
1998/1997
Change in Interest Due to:
------------------------------------
Average Average Net
(In thousands) Balance Rate Change
------- ------- -------
Assets
Federal funds sold and
interest bearing deposits
with banks $ 90 $--- $ 90
Investment securities -
available for sale 132 14 146
Loans 333 3 336
----- ----- -----
Total earning assets $ 555 $ 17 $ 572
===== ===== =====
Liabilities
Interest bearing deposits $ 373 $ 25 $ 398
Other borrowings 1 -- 1
----- ----- -----
Total interest bearing liabilities $ 374 $ 25 $ 399
===== ===== =====
Net interest income $ 173
=====
Net interest rate
spread (0.33%)
=====
Net interest margin on
earning assets (0.52%)
=====
Provision for Possible Credit Losses
1998 Compared to 1997. The provision for possible credit losses was $22,000
for the three month period ended March 31, 1998 compared to $39,000 for the
same period in 1997. The provision for possible credit losses was based upon
management's assessment of relevant factors, including types and amounts of
non-performing loans, historical and anticipated loss experience on such
types of loans, and current and projected economic conditions.
11
Non-interest Income
1998 Compared to 1997. Non-interest income was $81,000 for the three month
period ended March 31, 1998 compared to $72,000 for the same period in 1997,
an increase of $9,000 or 13%. This increase was primarily due to gains
recognized on the sale of investment securities.
Non-interest Expense
1998 Compared to 1997. Non-interest expense was $641,000 for the three month
period ended March 31, 1998 compared to $479,000 for the same period in 1997,
an increase of $162,000 or 34%. The largest components of non-interest
expense were salaries and employee benefits which amounted to $362,000 and
occupancy and equipment expense which amounted to $96,000 for the three month
period ended March 31, 1998. For the same period in 1997, salaries and
employee benefits and occupancy and equipment expense were $281,000 and
$51,000, respectively. The primary factor for these increases was the opening
of the Bank's office in Plymouth Township in August 1997. As of March 31,
1998, the number of full time equivalent employees was 30 as compared to 25
as of March 31, 1997.
Income Tax Benefit
1998 Compared to 1997. The income tax benefit was $50,000 for the three month
period ended March 31, 1998 compared to $25,000 for the same period in 1997,
an increase of $25,000 or 100%. The increase was due to the change in the
valuation allowance against a deferred tax asset related to net operating
loss carryforwards.
Comparison of Financial Condition at March 31, 1998 and March 31, 1997
Assets. Total assets at March 31, 1998 were $105.0 million compared to $65.1
million at March 31, 1997, an increase of $39.9 million or 61%. The increase
was primarily due to increases in federal funds sold, investment securities -
available for sale and loans.
Federal Funds Sold. Total federal funds sold at March 31, 1998 were $16.2
million compared to $1.6 million at March 31, 1997, an increase of $14.6
million or 913%. The increase was primarily due to the increase in deposits.
Investment Securities - Available for Sale. Total investment securities -
available for sale, at March 31, 1998 were $28.3 million compared to $19.4
million at March 31, 1997, an increase of $8.9 million or 46%. An increase in
deposits has enabled the Corporation to invest in investment securities -
available for sale until such time as quality loan opportunities become
available. All securities within the Corporation's portfolio are U.S.
treasury issues, U.S. government sponsored agency issues or corporate debt
securities carrying AAA ratings. The Corporation does not hold any securities
in the "Held to Maturity" category nor does the Corporation hold or utilize
derivatives.
12
The amortized cost and estimated market value of investments in debt
securities available for sale are as follows (in thousands):
March 31, 1998
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
US Treasury securities $ 2,001 $4 $ -- $ 2,005
US Government agency securities 21,497 1 (69) 21,429
Corporate debt securities 4,900 -- -- 4,900
------- -- ---- -------
Totals $28,398 $5 $ (69) $28,334
======= == ==== =======
March 31, 1997
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
US Treasury securities $ 3,001 $ -- $ (29) $ 2,972
US Government agency securities 16,503 1 (87) 16,417
Corporate debt securities -- -- -- --
------- ---- -------- ---------
Totals $19,504 $ 1 $ (116) $ 19,389
======= ==== ======= =========
Loans. Total loans at March 31, 1998 were $54.2 million compared to $40.1
million at March 31, 1997, an increase of $14.1 million or 35%. Major
categories of loans included in the loan portfolio are as follows (in
thousands):
03/31/98 12/31/97 03/31/97
-------- -------- --------
Consumer loans $ 12,818 $ 12,705 $ 9,544
Commercial, financial, & other 10,556 10,668 7,161
Commercial real estate construction 2,023 1,746 2,571
Commercial real estate mortgages 10,796 9,796 8,034
Residential real estate mortgages 17,977 17,224 12,809
-------- -------- --------
54,170 52,139 40,119
Allowance for possible credit losses (541) (522) (405)
-------- -------- --------
$ 53,629 $ 51,617 $ 39,714
======== ======== ========
13
The following is a summary of non-performing assets and problems loans (in
thousands):
03/31/98 12/31/97 03/31/97
-------- -------- --------
Non-accrual loans $20 $11 $ 6
Renegotiated loans -- -- --
Other real estate owned -- -- --
--- --- ---
$20 $43 $ 6
=== === ===
Allowance for Possible Credit Losses. The allowance for possible credit
losses at March 31, 1998 was $541,000 compared to $405,000 at March 31, 1997,
an increase of $136,000 or 34%. The increase in the allowance for possible
credit losses was based upon management's assessment of relevant factors,
including types and amounts of non-performing loans, historical and
anticipated loss experience on such types of loans, and current and projected
economic conditions.
The following is an analysis of the allowance for possible credit losses (in
thousands):
03/31/98 03/31/97
-------- --------
Balance, beginning of year $522 $366
Charge-offs:
Consumer Loans 3 --
---- ----
Net charge-offs 3 --
Additions charged to operations 22 39
---- ----
Balance, March 31 $541 $405
==== ====
Allowance to total loans 1.00% 1.07%
==== ====
Net charge-offs to average loans 0.01% ---%
==== ====
Bank Premises and Equipment. Bank premises and equipment at March 31, 1998
was $2.3 million compared to $2.1 million at March 31, 1997, an increase of
$0.2 million or 10%. This increase reflects the Bank's investment in
technology as well as capital expenditures necessary to open the Bank's
Plymouth Township Office.
14
Accrued Interest Receivable. Accrued interest receivable at March 31, 1998
was $538,000 compared to $637,000 at March 31, 1997, a decrease of $99,000 or
16%. The decrease was primarily due to semi-annual interest payments received
on investments securities - available for sale.
Other Assets. Other assets at March 31, 1998 were $300,000 compared to
$122,000 at March 31, 1997, an increase of $178,000 or 146%. The increase was
due to the Bank's recognition of income tax assets.
Deposits. Total deposits at March 31, 1998 were $95.1 million compared to
$56.1 million at March 31, 1997, an increase of $39.0 million or 70%. The
following is a summary of the distribution of deposits (in thousands):
03/31/98 12/31/97 03/31/97
-------- -------- --------
Non-interest bearing:
Demand $12,288 $ 8,587 $ 7,806
======= ======= =======
Interest bearing:
Checking $ 1,463 $ 1,274 $ 797
Money market 11,263 6,787 6,432
Savings 1,904 1,529 1,379
Time, under $100,000 43,497 36,114 23,700
Time, $100,000 and over
Non-volatile priced 14,928 12,055 9,908
Volatile priced 9,713 9,051 6,052
------- ------- -------
$82,768 $66,810 $48,268
======= ======= =======
The increase in deposits was primarily due to normal business development,
marketing, telemarketing, referral programs and growth strategies which
included two major marketing campaigns, an annual birthday celebration in
March each year and a grand opening celebration of the Bank's Plymouth
Township branch in August, 1997. The increase in deposits enabled the
Corporation to invest the funds in loans, federal funds sold and investment
securities available for sale.
Accrued Interest Payable. Accrued interest payable at March 31, 1998 was
$356,000 compared to $104,000 at March 31, 1997, an increase of $252,000 or
242%. The increase was due to the increase in the volume of time deposits.
15
Capital
Stockholders' equity at March 31, 1998 was $8.9 million compared to $8.2
million as of March 31, 1997, an increase of $0.7 million or 9%. The
following is a presentation of the Bank's regulatory capital ratios (in
thousands):
Minimum For Capital Minimum
Actual Adequacy Purposes: To Be Well Capitalized:
-------------------- ---------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of March 31, 1998
Total capital
(to risk
weighted
assets) $8,174 13.8% $4,742 8.0% $5,927 10.0%
Tier I capital
(to risk
weighted assets) 7,634 12.9% 2,371 4.0% 3,556 6.0%
Tier I capital
(to average
assets) 7,634 8.5% 3,592 4.0% 4,491 5.0%
As of March 31, 1997
Total capital
(to risk
weighted
assets) 6,338 17.0% 2,977 8.0% 3,722 10.0%
Tier I capital
(to risk
weighted
assets) 5,933 15.9% 1,489 4.0% 2,233 6.0%
Tier I capital
(to average
assets) 5,933 10.5% 2,256 4.0% 2,820 5.0%
Based on the respective regulatory capital ratios at March 31, 1998 and 1997,
the Bank is well capitalized.
On April 8, 1998, the Corporation completed an initial public offering of
common stock underwritten by Roney and Co. As a result of the offering, the
Corporation sold 1,380,000 shares of stock at a price of $14.00 per share and
received approximately $18 million in new capital, net of offering costs. The
Corporation is also now trading on the NASDAQ Small-Cap Market under the
symbol "DEAR".
Liquidity and Asset and Liability Management
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 includes
federal funds sold, securities available for sale, loan repayments, core
deposits and a federal funds purchase credit facility.
16
The Corporation has sought to manage its exposure to changes in interest
rates by matching more closely the effective maturities or repricing
characteristics of the Corporation's interest-earning assets and
interest-bearing liabilities. The matching of the asset 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.
Interest Rate Sensitivity Analysis. 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.
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 falling interest rates, the
Corporation's assets would tend to prepay faster than originally expected
thus decreasing the negative gap position. In addition, some of the
Corporation's assets, such as adjustable rate mortgages, have caps on the
amount by which their interest rates can change in any single period, and
therefore may not reprice as quickly as liabilities in the same maturity
category.
17
The following table set forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 1998 which are expected
to mature or reprice in each of the time periods shown (in thousands):
Interest Rate Sensitivity Period
------------------------------------------------------
1-90 91-365 1-5 Over
Days Days Years 5 Years Total
-------- ------- ------ -------- -----
Earning assets
Federal funds sold $ 16,239 $ -- $ -- $ -- $ 16,239
Mortgage loans held for sale 1,448 -- -- -- 1,448
Securities available for sale 4,900 1,002 22,432 -- 28,334
Total loans, net of
non-accrual 11,854 7,211 33,717 1,368 54,150
-------- -------- -------- -------- --------
Total earning assets 34,441 8,213 56,149 1,368 100,171
Interest bearing liabilities
Total interest bearing
deposits 15,145 49,914 17,709 -- 82,768
Mortgage payable -- -- -- 532 532
-------- -------- -------- -------- --------
Total interest bearing liabilities 15,145 49,914 17,709 532 83,300
Net asset (liability) funding gap 19,296 (41,701) 38,440 836 $ 16,871
-------- -------- -------- -------- ========
Cumulative net asset (liability)
funding gap $ 19,296 $(22,405) $ 16,035 $ 16,871
======== ======== ======== ========
Year 2000 Problem
The Corporation is aware of the current concerns throughout the business
community of reliance upon computer software programs that do not properly
recognize the year 2000 in date formats, often referred to as the "Year 2000
Problem." The Year 2000 Problem is the result of software being written using
two digits rather than four digits to define the application year (i.e., "98"
rather than "1998"). A failure by a business to properly identify and correct
a Year 2000 Problem in its operations could result in system failures or
miscalculations. In turn, this could result in disruptions of operations,
including among other things a temporary inability to process transactions,
send invoices or otherwise engage in routine business transactions on a
day-to-day basis.
Operations of the Corporation depend upon the successful operation on a daily
basis of its computer software programs. The Corporation relies upon software
purchased from third-party vendors rather than internally generated software,
and based upon its ongoing discussions with these vendors, the Corporation
believes that most of its software already reflects changes necessary to
avoid the Year 2000 Problem. The Corporation expects to update during 1998
any remaining software that could be affected by the Year 2000 Problem to
eliminate remaining concerns. This update is not expected to have a material
adverse effect on the Corporation.
18
DEARBORN BANCORP, INC.
FORM 10-Q (continued)
PART 2 - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS IN FORM 8-K.
(a) Financial Statements:
The following consolidated financial statements of Dearborn Bancorp,
Inc. and its subsidiary included in this report are:
Consolidated Balance Sheets - March 31, 1998, December 31, 1997 and
March 31, 1997
Consolidated Statements of Income - For the Three Months Ended March
31, 1998 and 1997
Consolidated Statements of Cash Flows - For the Three Months Ended
March 31, 1998 and 1997
Notes to Consolidated Financial Statements
(b) A Form 8-K Report was not filed during the three months ended March 31,
1998.
19
DEARBORN BANCORP, INC.
FORM 10-Q (continued)
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dearborn Bancorp, Inc.
(Registrant)
/s/ John E. Demmer
----------------------------------
John E. Demmer
Chairman and Chief Executive Officer
/s/ Michael J. Ross
-----------------------------------
Michael J. Ross
President
/s/ Jeffrey L. Karafa
-------------------------------------
Jeffrey L. Karafa
Treasurer and Chief Financial Officer
Date: May 6, 1998