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 September 30, 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 ______
ndicate the number of shares outstanding for each of the issuer's classes of
common stock, as of October 31, 1998.
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 - September 30, 1998, ----
December 31, 1997 and September 30, 1997 3
Consolidated Statements of Income - For the Three and Nine
Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Comprehensive Income - For the
Three and Nine Months Ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows - For the Three and
Nine Months Ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion of Results of Operations and
Analysi of Financial Condition, Liquidity and Capital 7-20
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 21
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 22
2
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands) 09/30/98 12/31/97 09/30/97
(unaudited) (audited) (unaudited)
---------- --------- ----------
ASSETS
Cash and cash equivalents
Cash and due from banks $ 1,955 $ 1,406 $ 1,412
Federal funds sold 13,132 254 4,150
--------- --------- ---------
Total cash and cash equivalents 15,087 1,660 5,562
Mortgage loans held for sale 444 347 190
Investment securities, available for sale 45,870 29,780 23,942
Loans
Loans 61,248 52,139 47,106
Allowance for possible credit losses (594) (522) (475)
--------- --------- ---------
Net loans 60,654 51,617 46,631
Bank premises and equipment, net 2,415 2,296 2,208
Accrued interest receivable 961 723 555
Other assets 380 230 183
--------- --------- ---------
Total assets $ 125,811 $ 86,653 $ 79,271
========= ========= =========
LIABILITIES
Deposits
Non-interest bearing deposits $ 9,320 $ 8,587 $ 8,900
Interest bearing deposits 87,621 66,810 60,835
--------- --------- ---------
Total deposits 96,941 75,397 69,735
Other liabilities
Federal funds purchased -- 1,500 --
Mortgage payable 523 537 541
Accrued interest payable 312 310 242
Other liabilities 239 157 187
--------- --------- ---------
Total liabilities 98,015 77,901 70,705
STOCKHOLDERS' EQUITY
Common stock - 5,000,000 shares authorized,
2,424,924 and 1,044,924 shares
outstanding in 1998 and 1997,
respectively 28,483 10,506 9,272
Accumulated deficit (747) (1,689) (651)
Net unrealized gain (loss) on securities
available for sale 60 (65) (55)
--------- --------- ---------
Total stockholders' equity 27,796 8,752 8,566
Total liabilities and
stockholders' equity $ 125,811 $ 86,653 $ 79,271
========= ========= =========
<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 Nine Months Ended
09/30/98 09/30/97 09/30/98 09/30/97
----------- ----------- ---------- ------------
Interest income
Interest on loans $ 1,375 $ 1,031 $ 3,830 $ 2,859
Interest on investment securities,
available for sale 773 313 1,862 844
Interest on federal funds and
deposits with banks 121 55 387 116
----------- ----------- ----------- -----------
Total interest income 2,269 1,399 6,079 3,819
Interest expense
Interest on deposits 1,162 769 3,271 2,037
Interest on other liabilities 10 11 32 32
----------- ----------- ----------- -----------
Total interest expense 1,172 780 3,303 2,069
Net interest income 1,097 619 2,776 1,750
Provision for possible credit losses 37 39 79 112
----------- ----------- ----------- -----------
Net interest income after provision
for possible credit losses 1,060 580 2,697 1,638
----------- ----------- ----------- -----------
Non-interest income
Service charges on deposit accounts 39 34 102 93
Fees for other services to customers 6 7 4 19
Gain on the sale of loans 63 32 156 100
Gain on the sale investment securities 20 13 36 13
Other income 1 1 18 4
----------- ----------- ----------- -----------
Total non-interest income 129 87 316 229
Non-interest expenses
Salaries and employee benefits 471 309 1,259 900
Occupancy and equipment expense 101 83 292 180
Advertising and marketing 17 27 62 83
Stationery and supplies 26 21 94 52
Professional services 39 21 100 64
Data processing 35 21 88 65
FDIC insurance premiums 3 2 7 5
Other operating expenses 67 67 169 203
----------- ----------- ----------- -----------
Total non-interest expenses 759 551 2,071 1,552
Income before income tax provision (benefit) 430 116 942 315
Income tax provision (benefit) 63 (40) -- (100)
----------- ----------- ----------- -----------
Net income $ 367 $ 156 $ 942 $ 415
=========== =========== =========== ===========
Per share data:
Net income - basic and diluted $ 0.15 $ 0.15 $ 0.49 $ 0.44
Weighted average number of
shares outstanding - basic 2,424,924 1,044,924 1,934,594 1,044,924
Weighted average number of
shares outstanding - diluted 2,435,861 1,044,924 1,950,531 1,044,924
<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, except share data) Three Months Ended Nine Months Ended
09/30/98 09/30/97 09/30/98 09/30/97
-------- -------- -------- --------
Net income $ 367 $ 156 $ 942 $ 415
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses)
arising during period 4 86 75 (12)
Less: reclassification adjustment
for gains included in net income (20) -- (36) --
----- ----- ----- -----
Other comprehensive income (16) 86 39 (12)
----- ----- ----- -----
Comprehensive income $ 351 $ 242 $ 981 $ 403
===== ===== ===== =====
<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)
9/30/98 09/30/97
------- --------
Cash flows from operating activities
Interest and fees received $ 5,947 $ 3,686
Interest paid (3,301) (1,954)
Proceeds from sale of mortgages held for sale 17,342 7,908
Origination of mortgages held for sale (12,228) (7,695)
Participations purchased in mortgages held for sale (5,054) --
Cash paid to suppliers and employees (1,964) (1,508)
-------- --------
Net cash provided by operating activities 742 437
Cash flows from investing activities
Proceeds from maturities of securities available for sale 30,864 15,000
Proceeds from sales of securities available for sale 30,043 2,613
Purchases of securities available for sale (76,820) (31,093)
Increase in loans, net of payments received 9,109 (10,846)
Purchases of property and equipment 288 (234)
-------- --------
Net cash (used in) investing activities (6,516) (24,560)
Cash flows from financing activities
Net increase in non-interest bearing deposits 733 1,317
Net increase in interest bearing deposits 20,811 20,955
Decrease in federal funds purchased (1,500) --
Principal payments on mortgage payable (14) (13)
Sale of common stock, net of offerings costs 17,977 --
-------- --------
Net cash provided by financing activities 38,007 22,259
Increase (decrease) in cash and cash equivalents 13,427 (1,864)
Cash and cash equivalents at the beginning of the period 1,660 7,426
-------- --------
Cash and cash equivalents at the end of the period $ 15,087 $ 5,562
======== ========
Reconciliation of net income to net cash provided by
operating activities
Net income $ 942 $ 415
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for possible credit losses 79 112
Depreciation and amortization expense 174 111
Accretion of discount on investment securities (17) (7)
Amortization of premium on investment securities 1 12
Gain on sale of investment securities (36) (13)
(Increase) decrease in mortgages held for sale (97) 113
(Increase) in interest receivable (238) (249)
Increase (decrease) in interest payable 2 51
(Increase) in other assets (150) (94)
Increase (decrease) in other liabilities 82 (78)
-------- --------
Net cash provided by operating activities $ 742 $ 437
======== ========
<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 and
nine month periods ended September 30, 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.
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. Actual 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.
7
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.
Results of Operations
The Corporation reported net income of $367,000 and $942,000 for the three
and nine month periods ended September 30, 1998, respectively, compared to
net income of $156,000 and $415,000 for the three and nine month periods
ended September 30, 1997. The improvement was a factor of growth in the
volume of loans and deposits and the corresponding net interest income
associated with the increased volumes. In addition, the Corporation completed
an initial stock offering of common stock on April 8, 1998 that netted the
Corporation $18.0 million in new capital which was invested in securities
available for sale at an average rate of 5.80%. See the "Capital" section of
this report for further information.
Net Interest Income
1998 Compared to 1997. Net interest income for the three month period ended
September 30, 1998 was $1,097,000 compared to $619,000 for the same period
ended September 30, 1997, an increase of $478,000 or 77%. This increase was
caused primarily by an increase in average earning assets of $52.2 million
between the periods while interest-bearing liabilities grew by $31.8 million.
At the same time the Corporation's interest rate spread decreased to 2.16% in
1998 from 2.57% in 1997. However, the Corporation's net interest margin
increased in 1998 to 3.64% from 3.62% in 1997. The decrease in net interest
spread was offset by increases in the volume of net earning assets. The
Corporation's decrease in interest rate spread was a result of investing the
Corporation's available funds in federal funds sold and investment
securities, available for sale, until which time the Corporation can deploy
the capital into other investments or acquisitions.
Net interest income for the nine month period ended September 30, 1998 was
$2,776,000 compared to $1,750,000 for the same period ended September 30,
1997, an increase of $1,026,000 or 59%. This increase was caused primarily by
an increase in average earning assets of $41.5 million between the periods
while interest-bearing liabilities grew by $27.1 million. At the same time
the Corporation's interest rate spread decreased to 2.08% in 1998 from 2.55%
in 1997. The Corporation's net interest margin also decreased in 1998 to
3.43% from 3.51% 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 result of investing the Corporation's available funds into
federal funds sold and investment securities, available for sale, until which
time the Corporation can deploy the capital into other investments or
acquisitions. In addition, the Corporation's decrease in interest rate spread
and net interest margin was a 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 deployed into
quality loans with higher yields.
8
Average Balances, Interest Rates and Yields. Net interest income is affected
by the difference ("interest rate spread") between rates of interest earned
on interest-earning assets and rates of interest paid on interest-bearing
liabilities and the relative amounts of interest-bearing liabilities and
interest-earning assets. When the total of interest-earning assets
approximates or exceeds the total of interest-bearing liabilities, any
positive interest rate spread will generate net interest income. Financial
institutions have traditionally used interest rate spreads as a measure of
net interest income. Another indication of an institution's net interest
income is its "net yield on interest-earning assets" or "net interest
margin," which is net interest income divided by average interest-earning
assets.
The following table sets forth certain information relating to the
Corporation's consolidated average interest-earning assets and
interest-bearing liabilities and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs
are derived by dividing income or expense by the average daily balance of
assets or liabilities, respectively, for the periods presented. During the
periods indicated, non-accruing loans, if any, are included in the net loan
category.
Three months ended September 30, Three months ended September 30,
1998 1997
-------------------------------- ---------------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
--------- -------- ------- --------- -------- -------
Assets
Federal funds sold and interest
bearing deposits with banks $ 8,904 $ 121 5.44% $ 4,075 $ 55 5.40%
Investment securities, available for sale 51,225 773 6.04% 20,266 313 6.18%
Loans 60,477 1,375 9.09% 44,092 1,031 9.35%
-------- ------ ---- ------- ------ ----
Sub-total earning assets 120,606 2,269 7.53% 68,433 1,399 8.18%
Other assets 5,230 4,646
-------- -------
Total assets $125,836 $73,079
======== =======
Liabilities and stockholders' equity
Interest bearing deposits $86,891 $1,162 5.35% $55,094 $ 769 5.58%
Other borrowings 525 10 7.62% 563 11 7.82%
-------- ------ ---- ------- ------ ----
Sub-total interest bearing
liabilities 87,416 1,172 5.36% 55,657 780 5.61%
Non-interest bearing deposits 10,344 8,556
Other liabilities 474 353
Stockholders' equity 27,602 8,513
-------- -------
Total liabilities and stockholders' equity $125,836 $73,079
======== =======
Net interest income $1,097 $ 619
====== ======
Net interest rate spread 2.16% 2.57%
==== ====
Net interest margin on earning
assets 3.64% 3.62%
==== ====
9
Nine months ended Nine months ended
September 30, 1998 September 30,1997
------------------------------- ------------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
-------- -------- ------- -------- -------- -------
Assets
Federal funds sold and interest
bearing deposits with banks $ 9,622 $ 387 5.36% $3,352 $ 116 4.61%
Investment securities, available for sale 41,982 1,862 5.91% 20,032 844 5.62%
Loans 56,453 3,830 9.05% 43,168 2,859 8.83%
-------- ------ ----- ------- ------- -----
Sub-total earning assets 108,057 6,079 7.50% 66,552 3,819 7.65%
Other assets 5,137 5,082
-------- -------
Total assets $113,194 $71,634
======== =======
Liabilities and stockholders' equity
Interest bearing deposits $ 80,695 $3,271 5.40% $53,560 $2,037 5.07%
Other borrowings 501 32 8.52% 549 32 7.77%
-------- ------ ----- ------- ------ ----
Sub-total interest bearing
liabilities 81,196 3,303 5.42% 54,109 2,069 5.10%
Non-interest bearing deposits 10,576 8,368
Other liabilities 478 354
Stockholders' equity 20,944 8,803
-------- --------
Total liabilities and
stockholders' equity $113,194 $71,634
======== =======
Net interest income $2,776 $1,750
====== ======
Net interest rate spread 2.08% 2.55%
==== ====
Net interest margin on
earning assets 3.43% 3.51%
==== ====
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.
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED NET INTEREST INCOME VOLUME / RATE ANALYSIS
Three months ended Nine months ended
September 30, 1998/1997 September 30, 1998/1997
Change in interest due to Change in interest due to
--------------------------------- ----------------------------
Average Average Net Average Average Net
(In thousands) Balance Rate Change Balance Rate Change
-------- -------- ------ ------- ------ ------
Assets
Federal funds sold and interest
bearing deposits with banks 66 $ 0 $ 66 252 $ 19 $ 271
Investment securities, available
for sale 467 (7) 460 974 $ 44 1,018
Loans 373 (29) 344 901 $ 70 971
------- ------ ------ ------- ------ -------
Total earning assets $ 906 $ (36) $ 870 $ 2,127 $ 133 $ 2,260
======= ====== ====== ======= ====== =======
Liabilities
Interest bearing deposits $ 425 $ (33) $ 392 1,102 $ 132 $ 1,234
Other borrowings -- -- -- -- -- --
------- ------ ------ ------- ------ -------
Total interest bearing liabilities $ 425 $ (32) $ 392 $ 1,102 $ 132 $ 1,234
======= ====== ====== ======= ====== =======
Net interest income $ 478 $ 1,026
====== =======
Net interest rate spread (0.41)% (0.48)%
====== =======
Net interest margin on
earning assets 0.02% (0.08)%
====== ======
Provision for Possible Credit Losses
1998 Compared to 1997. The provision for possible credit losses was $37,000
and $79,000 for the three and nine month periods ended September 30, 1998,
respectively, compared to $39,000 and $112,000 for the same periods in 1997,
an decrease of $2,000 or 5% for the three month period and an decrease of
$33,000 or 29% for the nine month period. 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 $129,000 and $316,000 for the
three and nine month periods ended September 30, 1998, respectively, compared
to $87,000 and $229,000 for the same periods in 1997, an increase of $42,000
or 48% for the three month period and an increase of $87,000 or 38% for the
nine month period. These increases were primarily due to gains on loans held
for sale, gains recognized on the sale of investment securities and the
collection of service charges on deposit accounts.
Non-interest Expense
1998 Compared to 1997. Non-interest expense was $759,000 and $2,071,000 for
the three and nine month periods ended September 30, 1998, respectively,
compared to $551,000 and $1,552,000 for the same periods in 1997, an increase
of $208,000 or 38% for the three month period and an increase of $519,000 or
33% for the nine month period. The largest components of non-interest expense
were salaries and employee benefits which amounted to $471,000 and $1,259,000
and occupancy and equipment expense which amounted to $101,000 and $292,000
for the three and nine month periods ended September 30, 1998, respectively.
For the same period in 1997, salaries and employee benefits were $309,000 and
$900,000 and occupancy and equipment expense were $83,000 and $180,000,
respectively. The primary factor for these increases was the opening of the
Bank's office in Plymouth Township in August 1997 and additions to staffing
in the lending department of the Bank in 1998. As of September 30, 1998, the
number of full time equivalent employees was 35 as compared to 26 as of
September 30, 1997.
Income Tax Benefit
1998 Compared to 1997. The income tax expense was $63,000 and $0 for the
three and nine month periods ended September 30, 1998 respectively, compared
to income tax benefits of $40,000 and $100,000 for the same periods in 1997.
The changes were due to the change in the valuation allowance against a
deferred tax asset related to net operating loss carryforwards. As of
September 30, 1998 the Corporation had released all available valuation
allowances against deferred tax assets.
Comparison of Financial Condition at September 30, 1998 and September 30, 1997
Assets. Total assets at September 30, 1998 were $125.8 million compared to
$79.3 million at September 30, 1997, an increase of $46.5 million or 59%. 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 September 30, 1998 were $13.1
million compared to $4.2 million at September 30, 1997, an increase of $8.9
million or 216%. The increase was primarily due to the increase in deposits.
Mortgage Loans Held for Sale. Total mortgage loans held for sale at September
30, 1998 were $444,000 compared to $190,000 at September 30, 1997, an
increase of $254,000 or 134%. This increase was primarily due to the increase
in loan volume.
12
Investment Securities - Available for Sale. Total investment securities -
available for sale, at September 30, 1998 were $45.9 million compared to
approximately $24.0 million at September 30, 1997, an increase of $21.9
million or 91%. An increase in the common stock and deposits has enabled the
Corporation to invest in investment securities - available for sale until
such time as quality loan opportunities or other higher yielding investments
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 ratings of Aa2 or better. The Corporation does not hold
any securities in the "Held to Maturity" category nor does the Corporation
hold or utilize derivatives.
The amortized cost and estimated market value of investments in debt
securities available for sale are as follows (in thousands):
September 30, 1998
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
US Treasury securities $32,573 $ 43 $ -- $32,616
US Government agency securities 2,001 17 -- 2,018
Corporate debt securities 11,236 -- -- 11,236
------- ------- ------- -------
Totals $45,810 $ 60 $ 0 $45,870
======= ======= ======= =======
September 30, 1997
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
US Treasury securities $ 2,000 $ 2 $ (2) $ 2,000
US Government agency securities 21,997 -- (55) 21,942
Corporate debt securities -- -- -- --
------- ------- ------- -------
Totals $23,997 $ 2 $ (57) $23,942
======= ======= ======= =======
13
Loans. Total loans at September 30, 1998 were $61.2 million compared to $47.1
million at September 30, 1997, an increase of $14.1 million or 30%. Major
categories of loans included in the loan portfolio are as follows (in
thousands):
LOANS
09/30/98 12/31/97 09/30/97
-------- -------- --------
Consumer loans $ 13,262 $ 12,705 $ 12,341
Commercial, financial, & other 13,178 10,668 8,180
Commercial real estate construction 1,888 1,746 1,765
Commercial real estate mortgages 11,954 9,796 8,560
Residential real estate mortgages 20,966 17,224 16,260
-------- -------- --------
61,248 52,139 47,106
Allowance for possible credit losses (594) (522) 475
-------- -------- --------
$ 60,654 $ 51,617 $ 46,631
======== ======== ========
The following is a summary of non-performing assets and problems loans (in
thousands):
09/30/98 12/31/97 09/30/97
-------- -------- --------
Non-accrual loans $ 37 $ 11 $ 9
Renegotiated loans -- -- --
Other real estate owned -- -- --
-------- -------- --------
$ 37 $ 11 $ 9
======== ======== ========
Allowance for Possible Credit Losses. The allowance for possible credit
losses at September 30, 1998 was $594,000 compared to $475,000 at September
30, 1997, an increase of $119,000 or 25%. 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.
14
The following is an analysis of the allowance for possible credit losses (in
thousands):
09/30/98 09/30/97
-------- --------
Balance, beginning of year $ 522 $ 366
Charge-offs:
Consumer Loans 7 3
------- -------
Net charge-offs 7 3
Additions charged to operations 79 112
------- -------
Balance, September 30 $ 594 $ 475
======= =======
Allowance to total loans 0.99% 1.01%
======= =======
Net charge-offs to average loans 0.01% 0.01%
======= =======
Average allowance for possible loan losses 549 413
Average total loans, gross 56,783 41,145
Average allowance to average total loans 0.97% 1.00%
Bank Premises and Equipment. Bank premises and equipment at September 30,
1998 was $2.4 million compared to $2.2 million at September 30, 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.
Accrued Interest Receivable. Accrued interest receivable at September 30,
1998 was $961,000 compared to $555,000 at September 30, 1997, an increase of
$406,000 or 73%. The increase was primarily due to semi-annual interest
payments accrued on investments securities available for sale.
Other Assets. Other assets at September 30, 1998 were $380,000 compared to
$183,000 at September 30, 1997, an increase of $197,000 or 108%. The increase
was due to the Bank's recognition of income tax assets.
15
Deposits. Total deposits at September 30, 1998 were $96.9 million compared to
$69.7 million at September 30, 1997, an increase of $27.2 million or 39%. The
following is a summary of the distribution of deposits (in thousands):
09/30/98 12/31/97 09/30/97
-------- -------- --------
Non-interest bearing:
Demand $ 9,320 $ 8,587 $ 8,900
======= ======= =======
Interest bearing:
Checking $ 2,646 $ 1,274 $ 756
Money market 14,130 6,787 5,924
Savings 1,884 1,529 1,371
Time, under $100,000 41,374 36,114 32,726
Time, $100,000 and over
Non-volatile priced 14,147 12,055 11,408
Volatile priced 13,440 9,051 8,650
------- ------- -------
$87,621 $66,810 $60,835
======= ======= =======
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 September 30, 1998 was
$312,000 compared to $242,000 at September 30, 1997, an increase of $70,000
or 29%. The increase was due to the increase in the volume of time deposits.
16
Capital
Stockholders' equity at September 30, 1998 was $27.8 million compared to $8.6
million as of September 30, 1997, an increase of $19.2 million or 223%. The
following is a presentation of the 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 September 30, 1998
Total capital
(to risk weighted assets) 10,672 16.40% 5,208 8.0% 6,510 10.0%
Tier I capital
(to risk weighted assets) 10,078 15.48% 2,604 4.0% 3,906 6.0%
Tier I capital
(to average assets) 10,078 9.36% 4,309 4.0% 5,386 5.0%
As of September 30, 1997
Total capital
(to risk weighted assets) 7,228 15.92% 3,631 8.0% 4,539 10.0%
Tier I capital
(to risk weighted assets) 6,753 14.88% 1,816 4.0% 2,723 6.0%
Tier I capital
(to average assets) 6,753 11.80% 2,550 4.0% 3,188 5.0%
Based on the respective regulatory capital ratios at September 30, 1998 and
1997, the Bank is considered 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 $18.0 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 include
federal funds sold, securities available for sale, loan repayments, core
deposits and a federal funds purchase credit facility.
17
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.
18
The following table set forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1998 which are
expected to mature or reprice in each of the time periods shown (in
thousands):
Interest Rate Sensitivity Period
--------------------------------------------------
(In thousands) 1-90 91-365 1-5 Over
Days Days Years 5 Years Total
------- -------- ------- -------- --------
Earning assets
Federal funds sold $13,132 $ -- $ -- $ -- $ 13,132
Mortgage loans held for sale 444 -- -- -- 444
Securities available for sale 12,239 -- 33,631 -- 45,870
Total loans, net of non-accrual 13,324 7,231 36,919 3,738 61,212
------- -------- ------- -------- --------
Total earning assets 39,139 7,231 70,550 3,738 120,658
Interest bearing liabilities
Total interest bearing deposits 28,164 39,069 20,388 -- 87,621
Mortgage payable -- -- -- 523 523
------- -------- ------- -------- --------
Total interest bearing liabilities 28,164 39,069 20,388 523 88,144
Net asset (liability) funding gap 10,975 (31,838) 50,162 3,215 $ 32,514
------- -------- ------- -------- --------
Cumulative net asset (liability)
funding gap $10,975 $(20,863) $29,299 $ 32,514
======= ========= ======= ========
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.
The Corporation began to prepare for the Year 2000 project in 1997. The plan
began with an internal evaluation of equipment, software applications and
vendor supplied products. The Corporation's main data processing vendor has
represented that it will be compliant by the end of 1998 , and regularly
provides updates on its progress to the Corporation. The Corporation has a
written plan which is regularly updated and reported to the Board of
Directors. The current phase of the plan is testing systems and equipment.
The testing phase is expected to be complete by December 1998. The
Corporation is also gathering information from significant borrowers and
depositors, to help mitigate any risk posed to the Bank by their
non-compliance.
19
During 1998, the Corporation incurred $29,000 in expenses related to testing
costs and employee wages. In addition, the corporation has made capital
expenditures of $67,000 to upgrade non-compliant personal computer
workstations, software and local area networks. Total expense for the year is
not expected to exceed $50,000. In August 1998, the corporation made a
capital expenditure of $151,000 to purchase a new mainframe computer to
accommodate the growth of the corporation. The mainframe was certified Year
2000 Compliant at the time of delivery. If any unusual and unforseen problems
arise during testing, costs could exceed our estimates. Additionally, if the
Corporation (or its customers or vendors) are unable to remedy any potential
Year 2000 problems in a timely manner, there could be a material adverse
effect on the Corporation's business. The Corporation has a written
contigency plan in place should testing fail on any given computer
application. Based on information that is currently available, the
Corporation does not anticipate that the cost of achieving Year 2000
compliance will have a material effect on its capital resources, results of
operations, or liquidity as presented herein.
20
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 - September 30, 1998, December 31,
1997 and September 30, 1997
Consolidated Statements of Income - For the Three and Nine Months Ended
September 30, 1998 and 1997
Consolidated Statements of Cash Flows - For the Three and Nine Months
Ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements
(b) A Form 8-K Report was not filed during the three months ended
September 30, 1998.
21
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: November 2, 1998