Dearborn Bancorp, Inc.
and its subsidiary
Community Bank of Dearborn
1998
ANNUAL REPORT
Inside Front Cover
[This Page Intentionally Left Blank]
Dearborn Bancorp, Inc.
and its subsidiary
Community Bank of Dearborn
CONTENTS
Description of Business..........................................4
Summary of Selected Financial Data...............................5
Chairman's and President's Letter to Stockholders................6
Report of Independent Certified Public Accountants...............8
Consolidated Balance Sheets......................................9
Consolidated Statements of Income ..............................10
Consolidated Statements of Comprehensive Income (Loss)..........11
Consolidated Statements of Stockholders' Equity.................12
Consolidated Statements of Cash Flows...........................13
Notes to Consolidated Financial Statements......................14
Management's Discussion and Analysis............................35
Dearborn Bancorp, Inc. Directors and Officers...................45
Community Bank of Dearborn Directors and Officers...............46
3
DESCRIPTION OF BUSINESS
Dearborn Bancorp, Inc.
Dearborn Bancorp, Inc. (the "Parent Company" and, together with its
subsidiary, the "Corporation") is a registered bank holding company which was
incorporated on September 30, 1992. The primary purpose of the holding
company is to own and operate the subsidiary bank, Community Bank of Dearborn
(the "Bank").
Community Bank of Dearborn
The Bank was incorporated on June 28, 1993 and began operations as a state
chartered commercial bank on February 28, 1994 from its main office located
on Michigan Avenue in Dearborn. On December 20, 1995, a second office located
on West Warren Avenue in Dearborn Heights was opened. On August 11, 1997, a
third office located on Five Mile Road at Sheldon Road in Plymouth Township
was opened. The Bank offers a wide range of financial products and services.
These include checking accounts, savings accounts, money market accounts,
certificates of deposit, business checking, direct deposit, loan services
(commercial, consumer, real estate mortgages), travelers' checks, cashiers'
checks, wire transfers, safety deposits boxes, collection services, and night
depository service. The Bank does not have a trust department.
FORM 10-K AVAILABLE
For a free copy of the Corporation's Form 10-K filed with the U.S. Securities
and Exchange Commission, please direct your request to Mr. Jeffrey L. Karafa,
Dearborn Bancorp, Inc., PO Box 2247, Dearborn, Michigan 48123-2247
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on May 19, 1999, at Park
Place, 23400 Park Avenue, Dearborn, Michigan, at 4:00 p.m.
DEARBORN BANCORP, INC. COMMON STOCK
Dearborn Bancorp, Inc. common stock is listed on the Nasdaq SmallCap Market
and is traded under the symbol "DEAR".
PRINCIPAL MARKET MAKERS
Advest, Inc.
First of Michigan Corporation
Herzog, Heine, Geduld, Inc.
Knight Securities, L.P.
Roney Capital Markets
STOCK TRANSFER AGENT AND REGISTRAR
Shareholders requiring a change of name, address or ownership of stock, as
well as information about shareholder records or lost or stolen certificates
should contact:
Fifth Third Bank
Corporate Trust Division
38 Fountain Square Plaza
Cincinnati, Ohio 45263
Toll Free 1-800-837-2755
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Grant Thornton LLP
26911 Northwestern Highway
Suite 400
Southfield, Michigan 48034
QUARTERLY COMMON STOCK PRICE INFORMATION
1998
-------------------------------------
High Low Close
-------------------------------------
Initial public offering (1) $ 14.00 $ -- $ --
Second quarter 18.14 14.00 14.46
Third quarter 14.71 10.54 11.77
Fourth quarter 13.73 9.80 10.50
(1) Dearborn Bancorp, Inc. began trading on the Nasdaq SmallCap Market on
April 8, 1998.
4
SUMMARY OF SELECTED FINANCIAL DATA
The following selected consolidated financial and other data as of and for
each of the five years in the period ended December 31, 1998 are derived from
the Corporation's audited consolidated financial statements. The information
set forth below should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Consolidated Statements
of Financial Condition as of December 31, 1998 and 1997, and the Consolidated
Statements of Operations for the years ended December 31, 1998, 1997 and 1996
are included elsewhere in this Annual Report.
At or for the years ended December 31,
---------------------------------------------------------------
(In thousands, except share data) 1998 1997 1996 1995 1994 (1)
---------------------------------------------------------------
OPERATIONS
Interest income $8,290 $5,404 $3,314 $2,023 $674
Interest expense 4,466 2,998 1,706 1,004 266
-------- ------- ------- ------- -------
Net interest income 3,824 2,406 1,608 1,019 408
Provision for possible credit losses 120 164 164 114 100
-------- ------- ------- ------- -------
Net interest income after provision for
possible credit losses 3,704 2,242 1,444 905 308
Total non-interest income 533 312 284 210 93
Total non-interest expense 2,941 2,089 1,701 1,403 1,065
-------- ------- ------- ------- -------
Income (loss) before federal income tax
provision (benefit) 1,296 465 27 (288) (664)
Income tax provision (benefit) 346 (145) --- --- ---
-------- ------- ------- ------- -------
Net income (loss) $950 $610 $27 ($288) ($664)
======== ======= ======= ======= =======
FINANCIAL CONDITION
Total assets $126,755 $86,653 $56,599 $35,130 $20,879
Investment securities, available for sale $50,211 $29,780 $10,493 $10,035 $7,088
Loans 66,023 52,139 36,263 19,945 9,907
Deposits 97,610 75,397 47,463 28,922 14,389
Other borrowings 517 2,037 554 569 584
Stockholders' equity 27,731 8,752 8,190 5,458 5,626
PER SHARE INFORMATION (2)
Net income per common share - basic and diluted $0.45 $0.57 $0.04 ($0.38) ($0.88)
Book value per common share $11.21 $8.21 $7.68 $7.22 $7.44
Average shares outstanding - basic 2,099,239 1,065,767 756,982 756,134 756,134
Average shares outstanding - diluted 2,112,866 1,076,922 756,982 756,134 756,134
Shares outstanding at end of period 2,473,295 1,065,767 1,065,767 756,134 756,134
OTHER DATA
Return on average assets 0.81% 0.86% 0.06% (1.01%) (5.12%)
Return on average equity 4.15% 7.23% 0.50% (5.20%) (11.62%)
Net interest margin 3.41% 3.60% 3.98% 3.92% 3.55%
Net interest spread 2.03% 2.54% 2.92% 2.65% 1.46%
Allowance for possible credit losses to total
loans 0.95% 1.01% 1.01% 1.02% 1.00%
Nonperforming assets to total assets 0.33% 0.04% 0.01% 0.21% ---%
Stockholders' equity to total assets 21.88% 10.10% 14.47% 15.54% 26.95%
Total interest expense to gross interest income 53.87% 55.48% 51.48% 49.63% 39.47%
Number of Offices 3 3 2 2 1
<FN>
(1) Bank operations began on February 28, 1994.
(2) All per share amounts presented have been adjusted to reflect the
issuance of stock dividends.
5
CHAIRMAN'S AND PRESIDENT'S LETTER
To Our Stockholders:
We have made great strides during the five years that Community Bank
of Dearborn has been open for business. From the time the Bank opened for
business the morning of February 28, 1994, we have grown to $126,755,000 in
total assets, $97,610,000 in total deposits, $66,023,000 in total loans and
$27,731,000 in stockholder's equity. We have expanded from one office to
three and plan to open a fourth in Canton Township in 1999. By every measure,
we have exceeded the projections we made when we organized the company and
applied for a bank charter. Our directors and senior officers are proud of
the progress we have made and pleased to report on our performance in 1998.
Net income for the year was $950,000 or $0.45 per common share. In
1997, we reported earnings of $610,000 or $0.57 per common share. This is a
56% increase in net income. Per share income decreased due to our highly
successful public offering of 1,380,000 new common shares at a price of $14
per share in April 1998. During 1998, our total assets grew by 46.3%, total
deposits went up by 29.5% and total loans grew by 26.7%.
Undoubtedly, the most significant event during the year was the
public offering. We now have almost $28 million in our capital accounts.
Today, we have enough capital along with earnings, to support more than $350
million in total assets while qualifying as a well capitalized institution.
Each additional $1 million that we retain in earnings will support another
$12.5 million in total assets.
Looking ahead to the Company's next five years, the most important
challenge we face is growing assets to employ our capital advantageously
while still not growing so fast that we risk regulatory criticism. If we can
increase total assets at an annually compounded rate of 20%, we should reach
total assets of about $250 million in approximately three and one half years
and approach $500 million in six or seven years. During that time, we hope to
have opportunities to make bank acquisitions, single branch acquisitions and
to expand our mortgage banking activities.
Alex Sheshunoff, the renowned banking consultant and analyst, has
said that high performance community banking organizations such as Dearborn
Bancorp should maintain an average return on average equity of at least 14%.
We see no reason why we cannot realistically project that we will achieve
that return on a sustainable basis before another five years has passed.
From the very beginning, our directors have indicated their
intention to ensure that our shareholders receive tangible evidence of
whatever progress our organization has made. Reflecting that philosophy, we
distributed a 10% stock dividend in January, 1998. Then, the board declared
another 2% stock dividend to be distributed in January, 1999. Realistically,
we are some years away from paying cash dividends but the distribution of
stock dividends is, in our opinion, an important step in the right direction.
There are two primary reasons why we continue to do so well. The
first is our successful marketing program. Its three principal components are
an aggressive officer call program, the use of sophisticated direct mail and
telemarketing and our enormously successful Community Club for those over age
50.
The second is the change that is taking place in the competitive
environment. Our marketing efforts are made more productive when giant
megabanks that dominate the markets where we do business sometimes fail to
meet the expectations of their customers. Often, the customers of these banks
grow dissatisfied when those institutions use technology and automation as a
means of reducing expenses. As they reduce staff levels, it becomes
increasingly difficult to find an officer who has the authority to make
important decisions and provide definitive answers.
A local institution such as Community Bank of Dearborn is a welcome
alternative to a megabank for some of these people. Our president's office is
readily accessible on the first floor of our Main Office. Our people have the
authority necessary to be responsive to customer requests they are likely to
receive.
6
Our directors meet in Dearborn. They live and work nearby. As they
go about their daily business, they have frequent contact with many of our
customers. They can see the results of the decisions they make as they travel
through the community. We believe that the positive opinions of banking
professionals and investors about Community Bank of Dearborn are reflected in
the number of similar institutions that have opened for business during the
past five years.
And so we look forward to the beginning of a new millenium with
confidence and optimism. Much of the credit for the success we have achieved
is due to our shareholders. The directors and senior officers join us in
thanking you for your contributions to the success we have made.
Sincerely,
John E. Demmer
Chairman of the Board
Michael J. Ross
President
7
Report of Independent Certified Public Accountants
Board of Directors
Dearborn Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Dearborn
Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income (loss),
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Dearborn Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Detroit, Michigan
February 17, 1999
8
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands) December 31,
----------------------
1998 1997
--------- ---------
ASSETS
Cash and cash equivalents
Cash and due from banks $ 2,259 $ 1,406
Federal funds sold 3,995 254
--------- ---------
Total cash and cash equivalents 6,254 1,660
Mortgage loans held for sale 1,211 347
Investment securities, available for sale 50,211 29,780
Loans
Loans 66,023 52,139
Allowance for possible credit losses (627) (522)
--------- ---------
Net loans 65,396 51,617
Bank premises and equipment, net 2,378 2,296
Accrued interest receivable 933 723
Other assets 372 230
--------- ---------
Total assets $ 126,755 $ 86,653
========= =========
LIABILITIES
Deposits
Non-interest bearing deposits $ 11,142 $ 8,587
Interest bearing deposits 86,468 66,810
--------- ---------
Total deposits 97,610 75,397
Other liabilities
Federal funds purchased -- 1,500
Mortgage payable 517 537
Accrued interest payable 338 310
Other liabilities 559 157
--------- ---------
Total liabilities 99,024 77,901
--------- ---------
Contingencies -- --
STOCKHOLDERS' EQUITY
Common stock - 5,000,000 shares authorized,
2,473,295 and 1,065,767
shares outstanding
In 1998 and 1997, respectively 29,015 10,506
Accumulated deficit (1,270) (1,689)
Accumulated comprehensive loss (14) (65)
--------- ---------
Total stockholders' equity 27,731 8,752
--------- ---------
Total liabilities and stockholders'
equity $ 126,755 $ 86,653
========= =========
<FN>
The accompanying notes are an integral part of these consolidated statements.
9
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data) Years Ended December 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
Interest income
Interest on loans $ 5,259 $ 3,981 $ 2,466
Interest on investment securities, available
for sale 2,504 1,235 733
Interest on federal funds and deposits with
banks 527 188 115
----------- ----------- -----------
Total interest income 8,290 5,404 3,314
Interest expense
Interest on deposits 4,425 2,955 1,662
Interest on other liabilities 41 43 44
----------- ----------- -----------
Total interest expense 4,466 2,998 1,706
Net interest income 3,824 2,406 1,608
Provision for possible credit losses 120 164 164
----------- ----------- -----------
Net interest income after provision for possible credit
losses 3,704 2,242 1,444
----------- ----------- -----------
Non-interest income
Service charges on deposit accounts 141 124 92
Fees for other services to customers 23 26 19
Gain on the sale of loans 286 144 130
Gain on the sale of investment securities 71 13 37
Other income 12 5 6
----------- ----------- -----------
Total non-interest income 533 312 284
Non-interest expenses
Salaries and employee benefits 1,700 1,218 1,060
Occupancy and equipment expense 411 267 198
Advertising and marketing 85 105 93
Stationery and supplies 120 80 56
Professional services 159 99 63
Data processing 123 90 71
FDIC insurance premiums 10 7 2
Other operating expenses 333 223 158
----------- ----------- -----------
Total non-interest expenses 2,941 2,089 1,701
----------- ----------- -----------
Income before federal income tax provision (benefit) 1,296 465 27
Income tax provision (benefit) 346 (145) --
----------- ----------- -----------
Net income $ 950 $ 610 $ 27
=========== =========== ===========
Per share data:
Net income - basic and diluted $ 0.45 $ 0.57 $ 0.04
Weighted average number of shares outstanding - basic 2,099,239 1,065,767 756,982
Weighted average number of shares outstanding - diluted 2,112,866 1,076,922 756,982
<FN>
The accompanying notes are an integral part of these consolidated statements.
10
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands) Years Ended December 31,
-------------------------
1998 1997 1996
------ ------ ------
Net income $ 950 $ 610 $ 27
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during period 98 (34) (10)
Less: reclassification adjustment for gains included
in net income 47 13 37
------ ------ ------
Other comprehensive income (loss) 51 (47) (47)
------ ------ ------
Comprehensive income (loss) $1,001 $ 563 ($ 20)
====== ====== ======
<FN>
The accompanying notes are an integral part of these consolidated statements.
11
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common
Stock
Subscribed Accumulated Total
Common but Accumulated Comprehensive Stockholder's
(In thousands, except shares) Stock Unissued Deficit Income (Loss) Equity
----------- ------------ -------------- ------------- -------------
Balance, January 1, 1996 $ 6,521 $ -- ($ 1,092) $ 29 $ 5,458
309,634 shares of common stock
subscribed (net of
offering costs of $8),
but unissued -- 2,752 -- -- 2,752
Net income -- -- 27 -- 27
Other comprehensive loss -- -- -- (47) (47)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 6,521 2,752 (1,065) (18) 8,190
309,634 shares of subscribed common
stock issued (net of
additional
offering costs of $1) 2,751 (2,752) -- -- (1)
10% stock dividend declared
December 16, 1997,
payable January 30, 1998 1,234 -- (1,234) -- --
Net income -- -- 610 -- 610
Other comprehensive loss -- -- -- (47) (47)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 10,506 -- (1,689) (65) 8,752
Initial public offering of
1,407,527 shares
of common stock (net of
offering costs of $1,342) 17,978 -- -- -- 17,978
2% stock dividend declared
December 15, 1998,
payable January 15, 1999 531 -- (531) -- --
Net income -- -- 950 -- 950
Other comprehensive income -- -- -- 51 51
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 $ 29,015 $ -- ($ 1,270) ($ 14) $ 27,731
=========== =========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these consolidated statements.
12
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Years Ended December 31,
------------------------------------
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities
Interest and fees received $ 8,256 $ 5,142 $ 3,415
Interest paid (4,438) (2,815) (1,671)
Proceeds from sale of mortgages held for sale 21,279 11,209 7,648
Origination of mortgages held for sale (21,857) (11,109) (7,413)
Cash paid to suppliers and employees (2,782) (2,032) (1,330)
--------- --------- ---------
Net cash provided by operating activities 458 395 649
Cash flows from investing activities
Proceeds from the sale of securities available
for sale 36,572 2,613 8,735
Proceeds from maturities of securities
available for sale 52,808 19,500 9,250
Purchases of securities available for sale (109,690) (41,438) (18,514)
Increase in loans, net of payments received (13,899) (15,884) (16,320)
Purchases of property and equipment (326) (369) (194)
--------- --------- ---------
Net cash used in investing activities (34,535) (35,578) (17,043)
Cash flows from financing activities
Net increase in non-interest bearing deposits 2,555 1,004 3,510
Net increase in interest bearing deposits 19,658 26,930 15,031
(Decrease) increase in federal funds purchased (1,500) 1,500 --
Principal payments on mortgage payable (20) (17) (15)
Initial public offering of common stock 17,978 -- --
Common stock subscriptions received -- -- 2,752
--------- --------- ---------
Net cash provided by financing activities 38,671 29,417 21,278
Increase (decrease) in cash and cash equivalents 4,594 (5,766) 4,884
Cash and cash equivalents at the beginning of the period 1,660 7,426 2,542
--------- --------- ---------
Cash and cash equivalents at the end of the period $ 6,254 $ 1,660 $ 7,426
========= ========= =========
Reconciliation of net income to net cash provided by
operating activities
Net income $ 950 $ 610 $ 27
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for possible credit losses 120 164 164
Depreciation and amortization expense 244 158 133
Accretion of discount on investment
securities (22) (6) (11)
Amortization of premium on investment
securities 23 10 72
Gain on the sale of investment (71) (13) (37)
securities
(Increase) decrease in mortgages held
for sale (864) (44) 105
Increase in interest receivable (210) (417) (16)
Increase in interest payable 28 183 35
(Increase) decrease in other assets (142) (142) 1
Increase (decrease) in other
liabilities 402 (108) 176
--------- --------- ---------
Net cash provided by operating activities $ 458 $ 395 $ 649
========= ========= =========
<FN>
The accompanying notes are an integral part of these consolidated statements.
13
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently
applied in the preparation of the accompanying consolidated
financial statements follows.
Basis of Presentation and Operations
Dearborn Bancorp, Inc. (the Corporation) was incorporated in
Michigan during 1992. The Corporation's subsidiary, Community Bank
of Dearborn (the Bank), began operations on February 28, 1994. The
Bank operates three community banking offices in Dearborn, Dearborn
Heights and Plymouth, Michigan, offering a full range of banking
services to individuals and businesses.
Principles of Consolidation
The consolidated financial statements include the accounts of
Dearborn Bancorp, Inc. and its wholly-owned subsidiary, Community
Bank of Dearborn. All significant intercompany transactions are
eliminated in consolidation.
Cash Equivalents
For purposes of the consolidated statements of cash flows, the
Corporation considers cash on hand, cash due from banks, and federal
funds sold to be cash equivalents.
Mortgages Held for Sale
Mortgages held for sale are carried at the lower of cost or market.
Market value is determined on the basis of existing forward delivery
contracts.
Investment Securities
When securities are purchased and the Corporation intends to hold
the securities for an indefinite period of time but not necessarily
to maturity, they are classified as available for sale and carried
at market value. Any decision to sell a security available for sale
would be based on various factors, including significant movements
in interest rates, changes in the maturity mix of the Corporation's
assets and liabilities, liquidity demands, regulatory capital
considerations, and other similar factors. Cost is adjusted for
amortization of premiums and accretion of discounts to maturity.
Unrealized gains and losses for available for sale securities are
excluded from income and recorded as an amount, net of tax, as a
separate component of comprehensive income. All of the Corporation's
securities are classified as available for sale.
Interest Income on Loans
Interest on loans is accrued and credited to income based upon the
principal amount outstanding. The accrual of interest on loans is
discontinued when, in the opinion of management, there is an
indication that the borrower may be unable to meet payments as they
become due. Upon such discontinuance, all unpaid interest accrued is
reversed. Interest accruals are generally resumed when all
delinquent principal and interest has been brought current or the
loan becomes both well secured and in the process of collection.
14
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Possible Credit Losses
The allowance is maintained at a level considered by management to
be adequate to provide for reasonably foreseeable loan losses based
on an evaluation of the loan portfolio, loan loss experience and the
economic environment.
Loan Impairment
A loan is identified as impaired when it is probable in the opinion
of management that interest and principal may not be collected
according to the contractual terms of the loan agreement.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets as follows:
Building and improvements - 5 to 30 years
Furniture and equipment - 5 to 10 years
Income Taxes
The Corporation files a consolidated federal income tax return. The
Corporation uses the asset and liability method of accounting for
income taxes. Deferred tax assets and liabilities are recorded based
on the difference between the tax bases of assets and liabilities
and their carrying amounts for financial reporting purposes. Tax
planning strategies are utilized in the computation of deferred
federal income taxes. In addition, the current or deferred tax
consequences of a transaction is measured by applying the provisions
of enacted tax laws to determine the amount of taxes receivable or
payable, currently or in future years.
Stock Options
The Financial Accounting Standards Board (the "FASB") issued
Statement No. 123, "Accounting for Stock Based Compensation" ("SFAS
No. 123") effective for transactions entered into during 1996 and
thereafter. The statement establishes a fair market value method of
accounting for employee stock options and similar equity instruments
such as warrants, and encourages all companies to adopt that method
of accounting for all their employee stock option plans. However,
the statement allows companies to continue measuring compensation
cost for such plans using accounting guidance in place prior to SFAS
No. 123. Companies that elect to remain with the former method of
accounting must make pro forma disclosures of net income and income
per share as if the fair value method provided for in SFAS No. 123
had been adopted. The Corporation has not adopted the fair value
provisions of SFAS No. 123 but has disclosed the pro forma effects
in accordance with the previous pronouncement.
15
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Dividends
The Corporation accounts for stock dividends by capitalizing
retained earnings in an amount equal to the fair value of the
additional shares issued. All share and per share amounts are
retroactively adjusted for stock dividends.
The Corporation declared a 2% stock dividend payable January 15,
1999, to shareholders of record as of December 24, 1998.
Accordingly, per share amounts for 1998, 1997 and 1996 have been
adjusted to reflect the dividend.
Income Per Share
Basic income per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted average
common shares outstanding for the period. Diluted income per share
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised and converted
into common stock or resulted in the issuance of common stock that
then shared in the income of the entity.
Comprehensive Income
The FASB has issued SFAS No. 130, "Comprehensive Income." The
statement requires that entities present items of other
comprehensive income in a financial statement with the same
prominence as other financial statements. The Corporation adopted
SFAS No. 130 in 1998.
Use of Estimates
In the preparation of financial statements, management is required
to make estimates and assumptions that affect reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ
from those estimates. Estimates that are more susceptible to change
in the near term include the allowance for possible credit losses
and fair value of certain financial instruments.
16
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE B - INVESTMENT SECURITIES - AVAILABLE FOR SALE
The amortized cost and estimated market value of investment
securities - available for sale are as follows (in thousands):
December 31, 1998
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
US Treasury securities $ 2,013 -- ($ 1) $ 2,012
US Government agency securities 31,682 -- (20) 31,662
Corporate debt securities 16,537 -- -- 16,537
------- ------- ------- -------
Totals $50,232 $ 0 ($ 21) $50,211
======= ======= ======= =======
December 31, 1997
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
US Treasury securities $ 2,001 $ 2 $ -- $ 2,003
US Government agency securities 27,844 -- (67) 27,777
------- ------- ------- -------
Totals $29,845 $ 2 ($ 67) $29,780
======= ======= ======= =======
The amortized cost and estimated market value of investment
securities - available for sale at December 31, 1998 by contractual
maturity, are shown below (in thousands):
Estimated
Amortized Market
Cost Value
--------- ----------
Due through one year $ 2,013 $ 2,012
Due in one year through five years 31,682 31,662
Due in five years through thirty years 16,537 16,537
------- -------
Totals $50,232 $50,211
======= =======
17
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE B - INVESTMENT SECURITIES - AVAILABLE FOR SALE (Continued)
Securities having an amortized cost of $2,013,216 and a market value
of $2,011,875 were pledged to secure public deposits. Securities
having an amortized cost of $2,003,976 and a market value of
$2,000,625 were pledged to secure treasury, tax and loan payments
with the Federal Reserve Bank of Chicago.
NOTE C - LOANS
Major categories of loans included in the portfolio at December 31
are as follows (in thousands):
1998 1997
-------- --------
Consumer loans $ 12,434 $ 12,705
Commercial, financial, & other 14,843 10,668
Commercial real estate construction 2,619 1,746
Commercial real estate mortgages 12,478 9,796
Residential real estate mortgages 23,649 17,224
-------- --------
66,023 52,139
Allowance for possible credit losses (627) (522)
-------- --------
$ 65,396 $ 51,617
======== ========
18
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE C - LOANS (Continued)
Final loan maturities and rate sensitivity of the loan portfolio at December
31, 1998 are as follows (in thousands):
Within Three to One to After
Three Twelve Five Five
Months Months Years Years Total
------- ------- ------- ------ -----
Consumer loans $ 2,327 $ 1,024 $ 8,927 $ 85 $12,363
Commercial, financial & other 7,009 628 7,174 -- 14,811
Commercial real estate
construction 669 1,632 318 -- 2,619
Commercial real estate mortgages 661 1,403 10,260 154 12,478
Residential real estate mortgages 1,023 5,352 10,722 6,245 23,342
------- ------- ------- ------- -------
$11,689 $10,039 $37,401 $ 6,484 65,613
======= ======= ======= =======
Non-accrual loans 410
-------
Total loans $66,023
=======
Loans at fixed interest rates $ 837 $ 1,569 $27,142 4,724 $34,272
Loans at variable interest rates 10,852 8,470 10,259 1,760 31,341
------- ------- ------- ------- -------
$11,689 $10,039 $37,401 $ 6,484 65,613
======= ======= ======= =======
Non-accrual loans 410
-------
Total loans $66,023
=======
Certain directors of the Corporation, including their associates,
were loan customers of the Bank during 1998. Such loans were made in
the ordinary course of business at the Bank's normal credit terms
and interest rates, and do not represent more than a normal risk of
collection. Total loans to these persons at December 31, 1998
amounted to $2,716,000. During 1998, $1,671,000 of new loans were
made and repayments totaled $944,000. These loans aggregated to 10%
of consolidated stockholder's equity as of December 31, 1998.
19
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE C - LOANS (Continued)
Transactions in the allowance for possible credit losses for the
years ended December 31 are as follows (in thousands):
1998 1997 1996
---- ---- ----
Balance, beginning of year $ 522 $ 366 $ 204
Charge-offs:
Consumer loans (15) (8) (4)
Recoveries:
Consumer loans -- -- 2
----- ----- -----
Net charge-offs (15) (8) (2)
Additions charged to operations 120 164 164
----- ----- -----
Balance at end of period $ 627 $ 522 $ 366
===== ===== =====
Allowance to total loans 0.95% 1.01% 1.01%
===== ===== =====
Net charge-offs to average loans 0.03% 0.02% 0.01%
===== ===== =====
20
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE C - LOANS (Continued)
The allocation of the allowance for possible credit losses as of
December 31, are as follows (in thousands):
1998 1997 1996
----------------------- ----------------------- ----------------------
Percent of Percent of Percent of
loans in loans in loans in
each each each
category to category to category to
Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ ------------
Consumer loans $ 20 18.83% $ 15 24.37% $ 8 24.48%
Commercial, financial & other 266 22.48% 7 20.46% 5 19.85%
Commercial real estate
construction 2 3.39% 1 3.35% 1 5.44%
Commercial real estate mortgages 9 18.90% 7 18.79% 4 17.60%
Residential real estate mortgages 101 36.40% 12 33.03% 8 32.63%
Unallocated 229 N/A 480 N/A 340 N/A
------ ------ ------ ------ ------ ------
$ 627 100.00% $ 522 100.00% $ 366 100.00%
====== ====== ====== ====== ====== ======
The aggregate balances on nonperforming loans and the reduction of
interest income associated with these loans at December 31, are as
follows (in thousands):
1998 1997 1996
---- ---- ----
Over 90 days past due and still accruing $ 2 $ 25 $---
Non-accrual loans 410 11 8
---- ---- ----
Total nonperforming assets $412 $ 36 $ 8
==== ==== ====
As a percentage of total loans 0.62% 0.07% 0.02%
==== ==== ====
Income in accordance with original loan terms $ 20 $ 2 $ 1
Income recognized -- -- --
---- ---- ----
Reduction in interest income $ 20 $ 2 $ 1
==== ==== ====
21
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE D - BANK PREMISES AND EQUIPMENT
Bank premises and equipment are comprised of the following at
December 31 (in thousands):
1998 1997
------ ------
Land and improvements $ 394 $ 394
Building and improvements 1,595 1,579
Furniture and equipment 1,052 742
------ ------
3,041 2,715
Less accumulated depreciation 663 419
------ ------
$2,378 $2,296
====== ======
NOTE E - DEPOSITS
The following is a summary of the distribution and weighted average
interest rate of deposits at December 31 (in thousands):
1998 1997
------------------------- ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ --------- ------ --------
Non-interest bearing:
Demand $11,142 -- $ 8,587 --
======= =======
Interest bearing:
Checking $ 3,630 2.96% $ 1,274 2.92%
Money market 11,215 3.39% 6,787 3.98%
Savings 2,079 2.50% 1,529 2.50%
Time, under $100,000 42,790 5.51% 36,114 6.01%
Time, $100,000 and over
Non-volatile priced 13,493 5.54% 12,055 6.00%
Volatile priced 13,261 5.36% 9,051 5.84%
------- -------
$86,468 $66,810
======= =======
22
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE E - DEPOSITS (Continued)
Final maturities of time deposits of $100,000 and greater at
December 31, 1998 are as follows (in thousands):
Non-volatile Volatile
priced Priced Total
------------ --------- -----
Due in three months or less $ 4,138 $ 5,911 $10,049
Due in three months through one year 4,594 7,203 11,797
Due in one year through five years 4,761 147 4,908
------- ------- -------
Totals $13,493 $13,261 $26,754
======= ======= =======
Time deposits of $100,000 and greater that are non-volatile priced
are time deposits that are priced using retail rates and would be
considered by the Bank as core deposits except for the fact that
they are issued in denominations of $100,000 or more. Volatile
priced time deposits of $100,000 and greater are time deposits that
are priced using wholesale rates and are typically referred to as
jumbo time deposits.
NOTE F - MORTGAGE PAYABLE
The mortgage payable with a bank matures September 1, 2012 and
requires monthly installments of $4,925 including interest at 6.82%
per annum. Effective September, 2003 the interest rate will be
computed annually at 2.5% plus the five year treasury rate. The note
is collateralized by a first real estate mortgage on a building and
land.
Aggregate principal payments for the five years following December
31, 1998 and thereafter are as follows (in thousands):
1999 $25
2000 26
2001 28
2002 30
2003 31
Thereafter 377
----
$517
====
23
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE G - FEDERAL FUNDS PURCHASED
The Bank has entered into federal funds credit lines with other
banks in the amount of $4,500,000 to provide additional flexibility
in the daily management of liquidity. The outstanding balance of the
federal funds credit line at December 31, 1997 was $1,500,000 and
was repaid on January 5, 1998.
NOTE H - INCOME TAXES
The federal tax provision consists of the following (in thousands):
1998 1997 1996
----- ----- ----
Current $ 119 $ -- $ --
Deferred 227 (145) --
----- ----- ----
$ 346 ($145) $ --
===== ===== ====
The reconciliation of the effective income tax rate to the federal
statutory tax rate is as follows:
1998 1997 1996
--- --- ---
Federal income tax rate 34% 34% (34%)
Effect of net operating loss
carryforward and valuation
Allowance (5) (63) (26)
Effect of graduated tax rates -- -- (18)
Other (2) (2) 10
--- --- ---
Effective tax rate 27% (31%) --%
=== === ===
24
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE H - INCOME TAXES (Continued)
The details of the net deferred tax asset (liability) are as follows
at December 31, (in thousands):
1998 1997
----- -----
Deferred tax assets
Provision for possible credit
losses $ 200 $ 163
Unrealized losses on securities
available for sale 8 23
Net operating loss carryforwards -- 282
Other -- 4
----- -----
Total deferred tax
assets 208 472
Deferred tax liabilities
Accretion of discounts on
securities available
for sale -- (4)
Deferred loan fees (91) (72)
Premises and equipment (57) (72)
Accrual to cash conversion (140) (115)
Unrealized gain on securities
available for sale (2) (1)
----- -----
Total deferred tax
liabilities (290) (264)
----- -----
Net deferred tax asset (liability) before
valuation allowance (82) 208
Valuation allowance -- (63)
----- -----
Net deferred tax asset (liability) ($ 82) $ 145
===== =====
The tax benefit of the unrealized losses on securities available for
sale, net of the valuation allowance, was charged directly to its
related component of stockholders' equity.
At December 31, 1998 the Corporation had utilized all net operating
loss carryforwards.
25
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE I - FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The estimated fair value of the Corporation's financial instruments
at December 31, are as follows (in thousands):
1998 1997
------------------------ ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
Assets:
Cash and cash equivalents $ 6,254 $ 6,254 $ 1,660 $ 1,660
Loans held for sale 1,211 1,229 347 349
Securities 50,211 50,211 29,780 29,780
Loans 65,396 65,221 51,617 51,020
Liabilities:
Deposits 97,610 97,424 75,397 75,507
Federal funds purchased -- -- 1,500 1,500
Mortgage Payable 517 517 537 537
The following methods and assumptions were used by the Corporation
in estimating its fair value disclosure for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and short-term instruments approximate those
assets' fair values.
Loans held for sale: The market value of these loans represents
estimated fair value. The market value is determined in the
aggregate on the basis of existing forward delivery commitments.
26
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE I - FINANCIAL INSTRUMENTS (Continued)
Fair Value of Financial Instruments (Continued)
Investment securities: Fair values for investment securities are
based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans: For variable rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using
discounted cash flow analysis, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. The carrying amount of accrued interest receivable
approximates its fair value.
Off-balance-sheet instruments: The Corporation's off-balance-sheet
instruments approximate their fair values.
Deposit liabilities: The fair values disclosed for demand deposits
are, by definition, equal to the amount payable on demand at the
reporting date. Fair values for fixed rate certificates of deposit
are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on similar certificates. The
carrying amount of accrued interest payable approximates its fair
value.
Mortgage payable: The fair value of the Corporation's mortgage
payable is estimated using discounted cash flow analysis, based on
the Corporation's current incremental borrowing rate for similar
types of borrowing arrangements.
Limitations: Fair value estimates are made at a specific point in
time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale, at one time, the
Corporation's entire holdings of a particular financial instrument.
Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are based
on management's judgments regarding future expected loss experience,
current economic conditions, risk characteristics and other factors.
These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could
significantly affect the estimates.
Off-Balance-Sheet Risk
The Corporation is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include
commitments to extend credit and financial guarantees. These
instruments involve, to varying degrees, elements of credit and
interest rate risk that are not recognized in the consolidated
statements of operations.
Exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit
and financial guarantees written is represented by the contractual
notational amount of those items. The Corporation generally requires
collateral to support such financial instruments in excess of the
contractual notational amount of those instruments and, therefore,
is in a fully collateralized position.
27
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE I - FINANCIAL INSTRUMENTS (Continued)
Off-Balance-Sheet Risk (Continued)
The Corporation has outstanding loan commitments aggregating
$9,367,000 and outstanding financial standby letters of credit
aggregating $498,000 at December 31, 1998.
Commitments to extend credit are agreements to lend to a customer as
long as there are no violations of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require a payment of a fee. Since
portions of the commitments are expected to expire without being
drawn upon, the total commitments do not necessarily represent
future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case by case basis. The amount of collateral
obtained upon extension of credit is based on management's credit
evaluation of the customer.
The Corporation originates primarily residential and commercial real
estate loans, commercial loans, and installment loans. The
Corporation estimates that 64% of the loan portfolio is based in
Wayne County, 22% in Oakland County, and the remainder primarily
distributed throughout Michigan.
At December 31, 1998, the Corporation has consumer loans secured by
real estate aggregating approximately $2,632,000 and construction
loans relating to commercial, residential, and land development
properties of $2,619,000.
NOTE J - EMPLOYEE BENEFIT PLANS
During 1996, the Bank established a 401(k) plan for its employees.
All employees are eligible to participate in the 401(k) after
completion of age and service requirements. An employee can be
enrolled as a participant on the first "Enrollment Date" after
reaching age 18 and completing six months of service. Contributions
to the plan by the Bank are discretionary. As of October 1, 1998,
the Corporation began matching 50% of the first 6% of employee
contributions to the plan. During 1998, matching contributions to
the plan totalled $7,000.
NOTE K - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and
possibly additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must
meet specific capital guidelines that involve quantitative measures
of the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital (as defined) to average assets (as defined).
28
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE K - REGULATORY MATTERS (Continued)
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 December 31, 1998
Total capital
(to risk weighted
assets) $10,622 16.2% $ 5,245 8.0% $ 6,557 10.0%
Tier I capital
(to risk weighted
assets) 9,995 15.2% 2,623 4.0% 3,934 6.0%
Tier I capital
(to average assets) 9,995 9.0% 4,438 4.0% 5,547 5.0%
As of December 31, 1997
Total capital
(to risk weighted
assets) 7,963 16.1% 3,964 8.0% 4,955 10.0%
Tier I capital
(to risk weighted
assets) 7,441 15.0% 1,982 4.0% 2,972 6.0%
Tier I capital
(to average assets) 7,441 9.1% 3,282 4.0% 4,102 5.0%
Based on the respective regulatory capital ratios at December 31,
1998 and 1997, the Bank is well capitalized.
NOTE L - COMMON STOCK SUBSCRIBED
On November 15, 1996, the Corporation issued an offering memorandum,
which included an over-subscription privilege, to those stockholders
who were residents of the State of Michigan. The offering memorandum
gave those stockholders the right to subscribe to 309,634 shares of
common stock at a price of $8.91 per share. All rights expired on
December 31, 1996.
At the close of business on December 31, 1996, the Corporation had
received requests to purchase 325,956 shares of common stock. In
accordance with the Corporation's offering memorandum, $2,760,000
was recorded as common stock subscribed, representing 309,634 shares
of common stock and $145,490 was recorded as an oversubscription
rights payable in other liabilities. On January 21, 1997, the common
stock subscribed was formally issued.
NOTE M - COMMON STOCK OFFERING
On April 8, 1998, the Corporation completed its initial public
offering of 1,407,527 shares of common stock at a price of $13.73
per share and began trading on the Nasdaq SmallCap Market.
29
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE N - STOCK OPTION PLAN
During 1994, the Corporation adopted a stock option plan to enable
key employees of the Corporation and its subsidiaries to participate
in the Corporation's future growth and profitability by the granting
of long-term performance-based incentive compensation. As of
December 31, 1996, 56,100 shares of common stock were authorized
with no options granted.
During 1997, the stock option plan was amended to allow up to
168,300 shares to be granted. Also in 1997, the Corporation issued
46,002 options at an exercise price of $8.91. No options were
exercised, expired or terminated during 1997.
During 1998, the stock option plan was amended to allow up to
255,000 shares to be granted. Also in 1998, the Corporation issued
33,150 options at an exercise price of $12.75. No options were
exercised, expired or terminated during 1998. At December 31, 1998,
79,152 options were outstanding and 175,848 options were available
for grant.
Granted options expire no later than ten years after the date of
grant, may not be exercised for six months after the date of grant
and are granted at a price of not less than the fair market value of
the Corporation's share price on the date of grant. If an option
expires or terminates without having been exercised, such option
will be available for future grant under the plan.
The Corporation accounts for the stock option plan under Accounting
Principles Board Option No. 25, "Accounting for Stock Issued to
Employees." No compensation costs have been recognized for the plan.
Had compensation costs for the plan been determined based on the
fair value of the options at the grant date consistent with the
method of SFAS No. 123, the Corporation's net income per share for
the years ended December 31, 1998 and 1997 would have been as
follows (in thousands, except per share data):
1998 1997
---- ----
Net income
As reported $950 $610
Pro forma 813 419
Basic and diluted income per share
As reported $0.45 $0.57
Pro forma 0.38 0.39
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes options-pricing model with the
following weighted-average assumptions used for grants in 1998 and
1997: dividend yield of 0.00%; expected volatility of 22.38% and
51.23% for 1998 and 1997, respectively; risk-free interest rate of
5.79% and 6.67% for 1998 and 1997, respectively; and expected lives
of ten years. All information presented with respect to stock
options has been adjusted for the effects of the stock dividend.
30
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE O - INCOME PER SHARE
The following is a reconciliation of the numerator and denominator
of the basic and diluted income per share calculation for the years
ended December 31, 1998 and 1997 (in thousands, except share data);
1998 1997
--------------------------------------- --------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic income per share
Net income available $ 950 2,099,239 $0.45 $ 610 1,065,767 $0.57
Effect of dilutive options -- 13,627 -- -- 11,155 --
--------- --------- ----- --------- --------- -----
Diluted income per share
Net income to
stockholders
plus assumed
conversions $ 950 2,112,866 $0.45 $ 610 1,076,922 $0.57
========= ========= ===== ========= ========= =====
NOTE P - CONTINGENCIES
LEGAL
From time to time, the Corporation and the Bank are parties to
various legal proceedings incidental to their business. At December
31, 1998, there were no legal proceedings which management
anticipates would have a material adverse effect on the Corporation.
YEAR 2000
The Year 2000 issue relates to limitations in computer systems and
applications that may prevent proper recognition of the Year 2000.
The potential effect of the Year 2000 issue on the Corporation and
its business partners will not be fully determinable until the Year
2000 and thereafter. If Year 2000 modifications are not properly
completed either by the Corporation or entities with which the
Corporation conducts business, the Corporation's revenues and
financial condition could be adversely impacted.
31
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE Q - ISSUED BUT NOT YET ADOPTED ACCOUNTING STANDARDS
The FASB has issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement requires that an
entity recognize all derivatives as either assets or liabilities on
the balance sheet and measure those instruments at fair value. The
statement is effective January 1, 2000 for the Corporation; however,
management does not expect this pronouncement to have a significant
impact on the Corporation's financial position.
The FASB has issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held
for Sale by a Mortgage Banking Enterprise. The statement requires
that an entity engaged in mortgage banking activities classify
resulting mortgage-backed securities and other retained interests
based on its ability and intent to sell or hold those investments.
This statement is effective in 1999 for the Corporation: however,
management does not expect this pronouncement to have an impact on
the Corporation's financial position.
32
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE R - PARENT ONLY CONDENSED FINANCIAL INFORMATION
The condensed financial information that follows presents the
financial condition of the parent company, Dearborn Bancorp, Inc.,
along with the results of its operations and its cash flows.
CONDENSED BALANCE SHEETS
(In thousands) December 31,
------------------
1998 1997
------- -------
ASSETS
Cash and cash equivalents $ 2,185 $ 181
Investment securities 14,460 0
Investment in subsidiary 9,985 7,376
Other assets 1,803 1,741
------- -------
Total assets $28,433 $ 9,298
======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Mortgage payable $ 517 $ 537
Other liabilities 185 9
Stockholders' equity 27,731 8,752
------- -------
Total liabilities and stockholder's equity $28,433 $ 9,298
======= =======
CONDENSED STATEMENTS OF INCOME
(In thousands) Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Operating income $ 655 $ 58 $ 35
Operating expenses (259) (68) (60)
----- ----- -----
Net income (loss) before equity in
undistributed income of subsidiary 396 (10) (25)
Equity in undistributed income
of subsidiary 554 620 52
----- ----- -----
Net income $ 950 $ 610 $ 27
===== ===== =====
33
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE R - PARENT ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands) Years Ended December 31,
----------------------------------
1998 1997 1996
-------- -------- --------
Cash flows from operating activities
Net income
Adjustments to reconcile net
income to net cash provided by
operating activities $ 950 $ 610 $ 27
Equity in undistributed
income of subsidiary (554) (620) (52)
Other 114 66 61
-------- -------- --------
Net cash flows provided by
operating activities 510 56 36
Cash flows from investing activities
Investment in subsidiary (2,004) (2,600) (850)
Investment in securities (20,608) (1,000) --
Maturity of securities 4,150 1.000 --
Sale of securities 1,998 -- 703
Property and equipment acquired -- (14) (101)
-------- -------- --------
Net cash flows used in
investing activities (16,464) (2,614) (248)
Cash flows from financing activities
Proceeds from sale of common
stock 17,978 -- 2,752
Proceeds due stockholders on
Oversubscription of
stock -- (145) 145
Reduction of mortgage payable (20) (17) (15)
-------- -------- --------
Net cash flows provided by (used in)
financing activities 17,958 (162) 2,882
Increase (decrease) in cash and
cash equivalents 2,004 (2,720) 2,670
Cash and cash equivalents at
beginning of year 181 2,901 231
-------- -------- --------
Cash and cash equivalents at end of year $ 2,185 $ 181 $ 2,901
======== ======== ========
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company 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. During December 1995, the Bank opened its second office, located at
24935 West Warren Avenue, Dearborn Heights, Michigan. In August 1997, the
Bank opened its third office, located at 44623 Five Mile Road, Plymouth
Township, Michigan.
Forward Looking Statements
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 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.
Results of Operations
The Company reported net income of $950,000 in 1998 compared to net income of
$610,000 in 1997 and net income of $27,000 in 1996. The improvement each year
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 period ended December 31,
1998 was $3.8 million compared to $2.4 million for the period ended December
31, 1997, an increase of $1.4 million or 58%. This increase was caused
primarily by an increase in average earning assets of $45.1 million between
the periods while interest-bearing liabilities grew by $29.1 million. At the
same time the Company's interest rate spread decreased to 2.03% in 1998 from
2.54% in 1997. The Company's net interest margin also decreased in 1998 to
3.41% from 3.60% 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 Company's decrease in interest rate spread and net interest
margin was a direct result of the repositioning of investment funds and
decreases in loan yields due to declining interest rates.
1997 Compared to 1996. Net interest income for the period ended December 31,
1997 was $2.4 million compared to $1.6 million for the period ended December
31, 1996, an increase of $0.8 million or 50%. This increase was caused
primarily by an increase in average earning assets of $26.5 million between
the periods while interest-bearing liabilities grew by $21.9 million. At the
same time the Company's interest rate spread decreased to 2.54% in 1997 from
2.92% in 1996. The Company's net interest margin also decreased in 1997 to
3.60% from 3.98% in 1996. However, the decreases in net interest spread and
net interest margin were offset by increases in the volume of net earning
assets. The Company'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.
35
The following table sets forth certain information relating to the Company's
consolidated average interest-earning assets and interest-bearing liabilities
and reflects the average yield on assets and average cost of liabilities for
the periods indicated. Such yields and costs are derived by dividing income
or expense by the average daily balance of assets or liabilities,
respectively, for the periods presented. During the periods indicated,
non-accruing loans, if any, are included in the net loan category.
Year Ended December 31, 1998 Year Ended December 31, 1997
------------------------------ ----------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
---------- -------- --------- -------- -------- -------
Assets
Federal funds sold and interest
bearing deposits with banks $ 9,827 $ 527 5.36% $ 3,351 $ 188 5.61%
Investment securities, available for
sale 42,853 2,504 5.84% 20,031 1,235 6.17%
Loans 59,355 5,259 8.86% 43,533 3,981 9.14%
-------- -------- ---- -------- -------- ----
Sub-total earning assets 112,035 8,290 7.40% 66,915 5,404 8.08%
Other assets 5,273 4,361
-------- --------
Total assets $117,308 $ 71,276
======== ========
Liabilities and stockholders' equity
Interest bearing deposits $ 82,702 $ 4,425 5.35% $ 53,559 $ 2,955 5.52%
Other borrowings 505 41 8.12% 582 43 7.39%
-------- -------- ---- -------- -------- ----
Sub-total interest bearing
liabilities 83,207 4,466 5.37% 54,141 2,998 5.54%
Non-interest bearing deposits 10,706 8,374
Other liabilities 509 322
Stockholders' equity 22,886 8,439
-------- --------
Total liabilities and
stockholders'
equity $117,308 $ 71,276
======== ========
Net interest income $ 3,824 $ 2,406
======== =======
Net interest rate spread 2.03% 2.54%
==== ====
Net interest margin on
earning assets 3.41% 3.60%
==== ====
36
(Continued) Year Ended December 31, 1996
-----------------------------
Average Average
(In thousands) Balance Interest Rate
------- -------- -------
Assets
Federal funds sold and interest
Bearing deposits with banks $ 2,137 $ 115 5.38%
Investment securities, available for
sale 12,400 733 5.91%
Loans 25,835 2,466 9.55%
------- ------- ----
Sub-total earning assets 40,372 3,314 8.21%
Other assets 3,618
-------
Total assets $43,990
=======
Liabilities and stockholders' equity
Interest bearing deposits $31,713 $ 1,662 5.24%
Other borrowings 564 44 7.80%
------- ------- ----
Sub-total interest bearing
liabilities 32,277 1,706 5.29%
Non-interest bearing deposits 6,142
Other liabilities 210
Stockholders' equity 5,361
-------
Total liabilities and
stockholders'
equity $43,990
=======
Net interest income $ 1,608
=======
Net interest rate spread 2.92%
====
Net interest margin on
earning assets 3.98%
====
37
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 1997/1996
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 $ 347 ($ 8) $ 339 $ 68 $ 5 $ 73
Investment securities,
available for sale 1,334 (65) 1,269 470 32 502
Loans 1,402 (124) 1,278 1,619 (104) 1,515
------- ------- ------- ------- ------- -------
Total earning assets $ 3,083 ($ 197) $ 2,886 $ 2,157 ($ 67) $ 2,090
======= ======= ======= ======= ======= =======
Liabilities
Interest bearing deposits $ 1,559 ($ 89) $ 1,470 $ 1,206 $ 87 $ 1,293
Other borrowings (6) 4 (2) 1 (2) (1)
------- ------- ------- ------- ------- -------
Total interest bearing liabilities $ 1,553 ($ 85) $ 1,468 $ 1,207 $ 85 $ 1,292
======= ======= ======= ======= ======= =======
Net interest income $ 1,418 $ 798
======= =======
Net interest rate spread (0.51%) (0.38%)
======= =======
Net interest margin on
earning assets (0.19%) (0.39%)
======= =======
Provision for Possible Credit Losses
1998 Compared to 1997. The provision for possible credit losses was $120,000
in 1998, compared to $164,000 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. Refer to Note C of the Notes to Consolidated Financial Statements
for additional information.
1997 Compared to 1996. The provision for possible credit losses was $164,000
in both 1997 and 1996. 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. Refer to Note
C of the Notes to Consolidated Financial Statements for additional
information.
38
Non-interest Income
1998 Compared to 1997. Non-interest income was $533,000 in 1998 compared to
$312,000 in 1997, an increase of $221,000 or 71%. This increase was primarily
due to gain on sale of loans and service charges on deposit accounts as a
result of an increase in the volume of these accounts.
1997 Compared to 1996. Non-interest income was $312,000 in 1997 compared to
$284,000 in 1996, an increase of $28,000 or 10%. This increase was primarily
due to service charges on deposit accounts as a result of an increase in the
volume of these accounts.
Non-interest Expense
1998 Compared to 1997. Non-interest expense was $2.9 million in 1998 compared
to $2.1 million in 1997, an increase of $0.8 million or 38%. The largest
components of non-interest expense in 1998 were salaries and employee
benefits which amounted to $1.7 million and occupancy and equipment expense
which amounted to $411,000. In 1997, salaries and employee benefits and
occupancy and equipment expense were $1.2 million and $267,000, respectively.
The primary factor for these increases was the opening of the Bank's office
in Plymouth Township in August 1997 and the expansion of the operations and
lending departments in 1998. As of December 31, 1998, the number of full time
equivalent employees was 36 as compared to 26 as of December 31, 1997.
1997 Compared to 1996. Non-interest expense was $2.1 million in 1997 compared
to $1.7 million in 1996, an increase of $0.4 million or 24%. The largest
components of non-interest expense were salaries and employee benefits which
amounted to $1.2 million and occupancy and equipment expense in 1997 which
amounted to $267,000. In 1996, salaries and employee benefits and occupancy
and equipment expense were $1.1 million and $198,000, respectively. The
primary factor for these increases was the opening of the Bank's office in
Plymouth Township in August 1997. As of December 31, 1997, the number of full
time equivalent employees was 26 as compared to 23 as of December 31, 1996.
Income Tax Provision
1998 Compared to 1997. The income tax expense for 1998 was $346,000, compared
to an income tax benefit of $145,000 in 1997, an increase of $491,000. Refer
to Note H of the Notes to Consolidated Financial Statements for additional
information.
1997 Compared to 1996. The income tax benefit for 1997 was $145,000, compared
to $0 in 1996. During 1997, the Bank recognized a $145,000 tax benefit from
the change in valuation allowance against a deferred tax asset related to net
operating loss carryforwards. Refer to Note H of the Notes to Consolidated
Financial Statements for additional information.
Comparison of Financial Condition at December 31, 1998 and December 31, 1997
Assets. Total assets at December 31, 1998 were $126.8 million compared to
$86.7 million at December 31, 1997, an increase of $40.1 million or 46%. The
increase was primarily due to increases in investment securities - available
for sale and loans.
Investment Securities - Available for Sale. Total investment securities -
available for sale, at December 31, 1998 were $50.2 million compared to $29.8
million at December 31, 1997, an increase of $20.4 million or 68%. During
1998 the Company purchased $109.7 million in securities and $52.8 million of
securities were called or matured during the year. In addition, the Company
sold securities of $36.6 million and recognized gain on such sales in the
amount of $71,000. The increase in deposits has enabled the Company to invest
in investment securities - available for sale until such time as quality loan
opportunities become available. All securities within the Company's U.S.
treasury or U.S. government sponsored agency portfolios carry AAA ratings.
All securities within the company's corporate debt portfolio carry AA2
ratings or better, are secured by an underlying letter of credit and have a 5
business day put option. The Company does not hold any securities in the
"Held to Maturity" category nor does the Company hold or utilize derivatives.
Refer to Note B of the Notes to Consolidated Financial Statements for
additional information.
39
Loans. Total loans at December 31, 1998 were $66.0 million compared to $52.1
million at December 31, 1997, an increase of $13.9 million or 27%. The
components of the outstanding balances and percentage increase in loans from
1998 to 1997 are as follows:
December 31, 1998 December 31, 1997
------------------- ------------------ Percent
Balance Percent Balance Percent Increase
------- ------- ------- ------- --------
Consumer loans $12,434 18.83% $12,705 24.37% (2.13%)
Commercial, financial, & other 14,843 22.48% 10,668 20.46% 39.14%
Commercial real estate 2,619 3.39% 1,746 3.35% 50.00%
construction
Commercial real estate mortgages 12,478 18.90% 9,796 18.79% 27.38%
Residential real estate mortgages 23,649 36.40% 17,224 33.03% 37.30%
------- ------ ------- ------ -----
$66,023 100.00% $52,139 100.00% 26.63%
======= ====== ======= ====== =====
Refer to Note C of the Notes to Consolidated Financial Statements for
additional information.
Allowance for Possible Credit Losses. The allowance for possible credit
losses at December 31, 1998 was $627,000 compared to $522,000 at December 31,
1997, an increase of $105,000 or 20%. 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. Refer to Note C of the Notes to Consolidated Financial
Statements for additional information.
Bank Premises and Equipment. Bank premises and equipment at December 31, 1998
was $2.4 million compared to $2.3 million at December 31, 1997, an increase
of $0.1 million or 4%. This increase reflects the Bank's investment in
technology.
Accrued Interest Receivable. Accrued interest receivable at December 31, 1998
was $933,000 compared to $723,000 at December 31, 1997, an increase of
$210,000 or 29%. The increase was due to increased loan volume and the
increased volume of investments securities - available for sale, for which
interest is receivable semi-annually.
Other Assets. Other assets at December 31, 1998 were $372,000 compared to
$230,000 at December 31, 1997, an increase of $142,000 or 62%. The increase
was primarily due to increases in prepaid insurance and prepaid maintenance
contracts.
40
Deposits. Total deposits at December 31, 1998 were $97.6 million compared to
$75.4 million at December 31, 1997, an increase of $22.2 million or 29%. The
components of the outstanding balances and percentage increase in deposits
from 1998 to 1997 are as follows:
December 31, 1998 December 31, 1998
--------------------------- ---------------------------
Balance Percent Balance Percent Increase/(Decrease)
------- ------- ------- ------- -------------------
Non-interest bearing:
Demand $ 11,142 11.41% $ 8,587 11.39% 29.75%
Interest bearing:
Checking $ 3,630 3.72% $ 1,274 1.69% 184.93%
Money market 11,215 11.49% 6,787 9.00% 65.24%
Savings 2,079 2.13% 1,529 2.03% 35.97%
Time, under
$100,000 42,790 43.84% 36,114 47.90% 18.49%
Time, $100,000
and over
Non-volatile
priced 13,493 13.82% 12,055 15.99% 11.93%
Volatile
priced 13,261 13.59% 9,051 12.00% 46.51%
----------- ------ ----------- ------ ------
$ 97,610 100.00% $ 75,397 100.00% 29.46%
=========== ====== =========== ====== ======
The increase in deposits was primarily due to growth in time deposits. During
1998, the Bank completed one major marketing campaign, an annual birthday
celebration in March, offering a premium rate of interest on time deposits.
This campaign raised in excess of $8 million in new deposits in a period of
approximately two weeks. Additional growth in all types of deposits was
achieved via normal marketing, telemarketing, referral and visitation
programs. The increase in deposits enabled the Company to invest the funds in
loans and investment securities - available for sale.
Federal Funds Purchased. There were no federal funds purchased at December
31, 1998 compared to $1.5 million at December 31, 1997. The Bank's federal
funds position in 1997 was a result of the Bank's need for liquidity to fund
an unanticipated $1.5 million outgoing wire transfer for a large customer
late in the day on December 31, 1997 and was repaid January 5, 1998.
Accrued Interest Payable. Accrued interest payable at December 31, 1998 was
$338,000 compared to $310,000 at December 31, 1997. The increase was due to
the increase in the volume of time deposits during 1998.
41
Capital
Stockholders' equity at December 31, 1998 was $27.7 million compared to $8.8
million as of December 31, 1997, an increase of $18.9 million or 215%. At
December 31, 1998, the Bank exceeded all applicable regulatory capital
requirements. The increase in Capital was primarily due to an initial public
offering of common stock on April 8, 1998. Refer to Note K and Note M of the
Notes to Consolidated Financial Statements for further information.
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.
The Company has sought to manage its exposure to changes in interest rates by
matching more closely the effective maturities or repricing characteristics
of the Company'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 Company's
assets mature or reprice more quickly or to a greater extent that its
liabilities, the Company'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 Company'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.
42
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 Company'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 Company's assets
would tend to prepay faster than originally expected thus decreasing the
negative gap position. In addition, some of the Company's assets, such as
adjustable rate mortgages, have caps on the amount by which their interest
rates can change in any single period, and therefore may not reprice as
quickly as liabilities in the same maturity category.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998 which are
expected to mature or reprice in each of the time periods shown.
DEARBORN BANCORP, INC. AND SUBSIDIARY
RATE SENSITIVITY ANALYSIS / GAP ANALYSIS
Interest Rate Sensitivity Period
-----------------------------------------------------
(In thousands) 1-90 91-365 1-5 Over
Days Days Years 5 Years Total
-------- -------- -------- -------- --------
Earning assets
Federal funds sold $ 3,995 $ -- $ -- $ -- $ 3,995
Mortgage loans held for sale 1,211 -- -- -- 1,211
Securities available for sale 16,537 2,013 31,661 -- 50,211
Total loans, net of non-accrual 13,428 8,519 39,230 4,846 66,023
-------- -------- -------- -------- --------
Total earning assets 35,171 10,532 70,891 4,846 121,440
Interest bearing liabilities
Total interest bearing deposits 23,838 37,546 25,084 -- 86,468
Mortgage payable -- -- -- 517 517
-------- -------- -------- -------- --------
Total interest bearing liabilities 23,838 37,546 25,084 517 86,985
Net asset (liability) funding gap 11,333 (27,014) 45,807 4,329 $ 34,455
-------- -------- -------- -------- ========
Cumulative net asset (liability) funding gap $ 11,333 ($15,681) $ 30,126 $ 34,455
======== ======== ======== ========
43
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on
the Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
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 is compliant at December 31, 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
testing phase of the plan was essentially complete on December 31, 1998. The
current phase of the plan is testing systems and equipment. The Corporation
has also been gathering information from significant borrowers and
depositors, to help mitigate any risk posed to the Bank by their
non-compliance.
During 1998, the Corporation has made expenditures of $313,000, of which
$65,000 was charged to expense for depreciation, testing and employee wages
to upgrade non-compliant personal computer workstations, software and local
area networks. In 1999, the Corporation expects to incur $99,000 in expenses
related to depreciation, testing costs and employee wages. 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.
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 contingency 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.
44
DEARBORN BANCORP, INC.
DIRECTORS AND OFFICERS
DIRECTORS
WILBER M. BRUCKER, JR.
Retired, Attorney
MARGARET I. CAMPBELL
Retired, Consultant
JOHN E. DEMMER
Chairman of the Board and
Chief Executive Officer
Jack Demmer Ford, Inc. and
Jack Demmer Leasing
MICHAEL V. DORIAN, JR.
Vice President
Mike Dorian Ford
DAVID HIMICK
Financial Consultant
DONALD G. KARCHER
Chairman of the Board
Karcher Agency, Inc.
BRADLEY F. KELLER
President
Braden Associates, Inc. and
MultiGard Properties, Ltd.
JEFFREY G. LONGSTRETH
President
Prudential Christie Real Estate
RICHARD NORDSTROM
Retired, Architect
MICHAEL J. ROSS
President and Chief Executive Officer
Community Bank of Dearborn
DR. ROBERT C. SCHWYN
Physician
RONNIE J. STORY
President and Chief Executive Officer
Story Development Corp. and Story Brothers Grading & Excavating
OFFICERS
JOHN E. DEMMER
Chairman of the Board and
Chief Executive Officer
RICHARD NORDSTROM
Vice Chairman
MICHAEL J. ROSS
President
JEFFREY L. KARAFA
Vice President and Treasurer
DONALD G. KARCHER
Vice President
WILBER M. BRUCKER, JR.
Secretary
45
COMMUNITY BANK OF DEARBORN
DIRECTORS AND OFFICERS
DIRECTORS
WILBER M. BRUCKER, JR.
Retired, Attorney
MARGARET I. CAMPBELL
Retired, Consultant
JOHN E. DEMMER
Chairman of the Board and
Chief Executive Officer
Jack Demmer Ford, Inc. and
Jack Demmer Leasing
MICHAEL V. DORIAN, JR.
Vice President
Mike Dorian Ford
DAVID HIMICK
Financial Consultant
DONALD G. KARCHER
Chairman of the Board
Karcher Agency, Inc.
BRADLEY F. KELLER
President
Braden Associates, Inc. and
MultiGard Properties, Ltd.
JEFFREY G. LONGSTRETH
President
Prudential Christie Real Estate
RICHARD NORDSTROM
Retired, Architect
MICHAEL J. ROSS
President and Chief Executive Officer
Community Bank of Dearborn
DR. ROBERT C. SCHWYN
Physician
RONNIE J. STORY
President and Chief Executive Officer
Story Development Corp. and Story
Brothers Grading & Excavating
OFFICERS
JOHN E. DEMMER
Chairman of the Board
MICHAEL J. ROSS
President
Chief Executive Officer
TIMOTHY J. CUTTLE
Executive Vice President
Chief Lending Officer
JEFFREY L. KARAFA
Vice President
Cashier
BRIAN A. MAMO
Vice President
Commercial Lending
JEFFREY J. WOLBER
Vice President
Retail Administration
GARY AMES JR.
Controller
NANCY M. BARON
Compliance Officer
WILBER M. BRUCKER, JR.
Secretary
DANIEL A. BZURA
Branch Officer
SAMANTHA J. MAZIASZ
Bank Administration Officer
LARRY D. MORSE
Credit Officer
DENIS T. NISSLE
Private Banking Officer
STEVEN P. SLADE
Consumer Banking Officer
DENISE STAFFELD
Mortgage Loan Officer
46
COMMUNITY BANK OF DEARBORN
BRANCH LOCATIONS
Main Office Hours: 9:30 AM - 4:30 PM Monday through Friday
22290 Michigan Avenue 9:30 AM - 6:00 PM Friday
PO Box 2247 9:30 AM - 1:00 PM Saturday, Drive-In Only
Dearborn, Michigan 48123-2247
Phone: (313) 274-1000
Fax: (313) 274-5050
Cynthia A. Pizzo, Branch Officer
Warren Avenue and Silvery Lane Hours: 9:00 AM - 4:30 PM Monday through Thursday
24935 West Warren Avenue 9:00 AM - 6:00 PM Friday
Dearborn Heights, Michigan 48127
Phone: (313) 724-0100
Fax: (313) 724-1010
Daniel A. Bzura, Branch Officer
Five Mile and Sheldon Road Hours: 9:00 AM - 4:30 PM Monday through Thursday
44623 Five Mile 9:00 AM - 6:00 PM Friday
Plymouth, Michigan 48170 9:30 AM - 1:00 PM Saturday, Walk-Up Window
Phone: (734) 454-1000
Fax: (734) 454-0123
Trudy J. Anderson, Branch Manager
47
DEARBORN BANCORP, INC.
22290 Michigan Avenue
PO Box 2247
Dearborn, Michigan 48123-2247
Phone: (313) 274-1000