SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly period ended March 31, 1999.
------------------------------
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 Identification No.)
incorporation or organization)
22290 Michigan Avenue, Dearborn, MI 48123-2247
---------------------------------------------------
(Address of principal executive office) (Zip Code)
(313) 274-1000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ___ X __ No ______
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of April 30, 1999.
Class Shares Outstanding
----- ------------------
Common Stock 2,473,295
DEARBORN BANCORP, INC.
INDEX
Part I. Financial Information:
Item 1. Financial Statements
The following consolidated financial statements of Dearborn
Bancorp, Inc. and its subsidiary included in this report are: Page
----
Consolidated Balance Sheets - March 31, 1999,
December 31, 1998 and March 31, 1998 3
Consolidated Statements of Income - For the Three
Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Comprehensive Income - For the
Three Months Ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows - For the Three
Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion of Results of Operations and Analysis
of Financial Condition, Liquidity and Capital 7-19
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 20
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 Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
SIGNATURES 21
2
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands) 03/31/99 12/31/98 03/31/98
(unaudited) (audited) (unaudited)
----------- --------- -----------
ASSETS
Cash and cash equivalents
Cash and due from banks $ 2,705 $ 2,259 $ 2,226
Federal funds sold 8,542 3,995 16,239
--------- --------- ---------
Total cash and cash equivalents 11,247 6,254 18,465
Mortgage loans held for sale 413 1,211 1,448
Investment securities, available for sale 53,899 50,211 28,334
Loans
Loans 67,136 66,023 54,170
Allowance for possible credit losses (706) (627) (541)
--------- --------- ---------
Net loans 66,430 65,396 53,629
Bank premises and equipment, net 2,344 2,378 2,265
Accrued interest receivable 903 933 538
Other assets 449 372 300
--------- --------- ---------
Total assets $ 135,685 $ 126,755 $ 104,979
========= ========= =========
LIABILITIES
Deposits
Non-interest bearing deposits $ 12,341 $ 11,142 $ 12,288
Interest bearing deposits 94,146 86,468 82,768
--------- --------- ---------
Total deposits 106,487 97,610 95,056
Other liabilities
Mortgage payable 511 517 532
Accrued interest payable 377 338 356
Other liabilities 452 559 137
--------- --------- ---------
Total liabilities 107,827 99,024 96,081
STOCKHOLDERS' EQUITY
Common stock - 5,000,000 shares authorized,
2,473,295 and 1,065,767
shares outstanding in
1999 and 1998, respectively 29,015 29,015 10,476
Accumulated deficit (1,094) (1,270) (1,514)
Accumulated comprehensive loss (63) (14) (64)
--------- --------- ---------
Total stockholders' equity 27,858 27,731 8,898
Total liabilities and stockholders'
equity $ 135,685 $ 126,755 $ 104,979
========= ========= =========
<FN>
The accompanying notes are an integral part of these consolidated statements.
3
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(In thousands, except share data) Three Months Ended
03/31/99 03/31/98
----------- -----------
Interest income
Interest on loans $ 1,409 $ 1,205
Interest on investment securities, available
for sale 651 375
Interest on federal funds and deposits with
banks 76 115
----------- -----------
Total interest income 2,136 1,695
Interest expense
Interest on deposits 1,052 976
Interest on other liabilities 9 12
----------- -----------
Total interest expense 1,061 988
Net interest income 1,075 707
Provision for possible credit losses 82 22
----------- -----------
Net interest income after provision for possible credit
losses 993 685
----------- -----------
Non-interest income
Service charges on deposit accounts 41 31
Fees for other services to customers 7 7
Gain on the sale of loans 100 27
Gain on the sale investment securities -- 13
Other income -- 3
----------- -----------
Total non-interest income 148 81
Non-interest expenses
Salaries and employee benefits 526 362
Occupancy and equipment expense 107 96
Advertising and marketing 18 23
Stationery and supplies 43 25
Professional services 42 36
Data processing 36 28
FDIC insurance premiums 3 2
Other operating expenses 97 69
----------- -----------
Total non-interest expenses 872 641
Income before income tax provision(benefit) 269 125
Income tax provision(benefit) 93 (50)
----------- -----------
Net income $ 176 $ 175
=========== ===========
Per share data:
Net income - basic and diluted $ 0.07 $ 0.16
Weighted average number of shares outstanding - basic 2,473,295 1,065,761
Weighted average number of shares outstanding - diluted 2,475,577 1,077,071
<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
03/31/99 03/31/98
-------- -------
Net income $ 176 $ 175
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising (49) 14
during period
Less: reclassification adjustment for gains
included in net income -- (13)
----- -----
Other comprehensive income (49) 1
----- -----
Comprehensive income $ 127 $ 176
===== =====
The accompanying notes are an integral part of these consolidated
statements.
5
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands) Three Months Ended
3/31/99 03/31/98
------- --------
Cash flows from operating activities
Interest and fees received $ 2,167 $ 1,921
Interest paid (1,022) (942)
Proceeds from sale of mortgages held for sale 6,744 3,160
Origination of mortgages held for sale (5,846) (4,234)
Cash paid to suppliers and employees (1,023) (631)
-------- --------
Net cash provided by (used in) operating
activities 1,020 (726)
Cash flows from investing activities
Proceeds from maturities of securities
available for sale 23,437 15,350
Proceeds from sales of securities
available for sale 2,400 6,015
Purchases of securities available for sale (29,634) (19,900)
Increase in loans, net of payments received (1,113) (2,034)
Purchases of property and equipment (26) (24)
-------- --------
Net cash (used in) investing activities (4,936) (593)
Cash flows from financing activities
Net increase in non-interest bearing deposits 1,199 3,701
Net increase in interest bearing deposits 7,716 15,958
Decrease in federal funds purchased -- (1,500)
Principal payments on mortgage payable (6) (5)
Sale of common stock, net of offerings costs -- (30)
-------- --------
Net cash provided by financing activities 8,909 18,124
Increase (decrease) in cash and cash equivalents 4,993 16,805
Cash and cash equivalents at the beginning of
the period 6,254 1,660
-------- --------
Cash and cash equivalents at the end of the period $ 11,247 $ 18,465
======== ========
Reconciliation of net income to net cash provided by
(used in) operating activities
Net income $ 177 $ 175
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Provision for possible credit losses 82 22
Depreciation and amortization expense 47 56
Accretion of discount on investment securities -- (6)
Amortization of premium on investment securities 35 --
Gain on sale of investment securities -- (13)
(Increase) decrease in mortgages held for sale 798 (1,101)
Decrease in interest receivable 30 185
Increase in interest payable 39 46
(Increase) in other assets (75) (70)
(Decrease) in other liabilities (113) (20)
-------- --------
Net cash provided by (used in) operating activities $ 1,020 ($ 726)
======== ========
The accompanying notes are an integral part of these consolidated statements.
6
DEARBORN BANCORP, INC.
FORM 10-Q (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting and Reporting Policies
The financial statements of Dearborn Bancorp, Inc. (the
"Corporation") include the consolidation of its only subsidiary,
Community Bank of Dearborn (the "Bank"). The accounting and
reporting policies of the Corporation are in accordance with
generally accepted accounting principles and conform to practice
within the banking industry.
The unaudited financial statements of the Corporation for the three
month periods ended March 31, 1999 and 1998 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 1998 Annual Report to Stockholders.
PART 1 - FINANCIAL INFORMATION
ITEM 2. - MANAGEMENT'S DISCUSSION, ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis are intended to address significant
factors affecting the financial condition and results of operations of the
Corporation. The discussion provides a more comprehensive review of the
financial position and operating results than can be obtained from a reading
of the financial statements and footnotes presented elsewhere in this report.
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 $176,000 for the three month period
ended March 31, 1999, compared to net income of $175,000 for the three period
ended March 31, 1998. The positive impact on net interest income of
significant growth in the volume of loans and deposits was offset by the
increase in loan loss reserves.
Net Interest Income
1999 Compared to 1998. Net interest income for the three month period ended
March 31, 1999 was $1,075,000 compared to $707,000 for the same period ended
March 31, 1998, an increase of $368,000 or 52%. This increase was caused
primarily by an increase in average earning assets of $37.4 million between
the periods while interest-bearing liabilities grew by $16.8 million. At the
same time the Corporation's interest rate spread decreased to 2.15% in 1999
from 2.43% in 1998. However, the Corporation's net interest margin increased
in 1999 to 3.52% from 3.33% in 1998. 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.
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.
8
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 March 31, Three months ended March 31,
1999 1998
-------------------------------- --------------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
-------- -------- -------- ------- -------- --------
Assets
Federal funds sold and interest
bearing deposits with banks $5,580 $76 5.45% $ 8,275 $ 115 5.56%
Investment securities, available
for sale 48,695 652 5.36% 23,867 375 6.28%
Loans 68,081 1,409 8.28% 52,849 1,205 9.12%
-------- ------ ---- ------- ----- ----
Sub-total earning assets 122,356 2,137 6.98% 84,991 1,695 7.98%
Other assets 5,365 6,374
-------- -------
Total assets $127,721 $91,365
======== =======
Liabilities and stockholders' equity
Interest bearing deposits $87,308 $1,052 4.82% $70,614 $ 976 5.53%
Other borrowings 514 9 7.00% 601 12 7.99%
-------- ------ ---- ------- ------ ----
Sub-total interest bearing
liabilities 87,822 1,061 4.83% 71,215 988 5.55%
Non-interest bearing deposits 11,161 10,372
Other liabilities 961 449
Stockholders' equity 27,777 9,329
-------- -------
Total liabilities and
stockholders' equity $127,721 $91,365
======== =======
Net interest income $1,076 $ 707
====== ======
Net interest rate spread 2.15% 2.43%
==== ====
Net interest margin on
earning assets 3.52% 3.33%
==== ====
9
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.
1999/1998
Change in Interest Due to:
---------------------------
Average Average Net
(In thousands) Balance Rate Change
------- ------- ------
Assets
Federal funds sold and interest
bearing deposits with banks $ (37) $ (2) $(39)
Investment securities, available for sale 332 (55) 277
Loans 315 (111) 204
===== ===== =====
Total earning assets $ 611 $(169) $ 442
===== ===== =====
Liabilities
Interest bearing deposits $ 203 $(127) $ 76
Other borrowings (2) (1) (3)
===== ===== =====
Total interest bearing liabilities $ 201 $(128) $ 73
===== ===== =====
Net interest income $ 369
=====
Net interest rate spread (0.27)%
=====
Net interest margin on earning assets 0.19%
=====
Provision for Possible Credit Losses
1999 Compared to 1998. The provision for possible credit losses was $82,000
for the three month period ended March 31, 1999, compared to $22,000 for the
same period in 1998, an increase of $60,000 or 273% for the period. The
company has increased its provision for possible credit losses as the level
of non-accrual loans has increased during the 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.
10
Non-interest Income
1999 Compared to 1998. Non-interest income was $148,000 for the three month
period ended March 31, 1999, compared to $81,000 for the same period in 1998,
an increase of $67,000 or 83% for the period. This increase was primarily due
to gains on loans held for sale.
Non-interest Expense
1999 Compared to 1998. Non-interest expense was $872,000 for the three month
period ended March 31, 1999, compared to $641,000 for the same period in
1998, an increase of $231,000 or 36% for the period. The largest components
of non-interest expense were salaries and employee benefits which amounted to
$548,000 and occupancy and equipment expense which amounted to $107,000 for
the three month period ended March 31, 1999. For the same period in 1998,
salaries and employee benefits was $362,000 and occupancy and equipment
expense was $96,000. The primary factor for these increases was the expansion
of the operations and lending departments of the Bank in 1998 and 1999. As of
March 31, 1999, the number of full time equivalent employees was 38 as
compared to 30 as of March 31, 1998.
Income Tax Benefit
1999 Compared to 1998. The income tax expense was $93,000 for the three month
period ended March 31, 1999, compared to an income tax benefit of $50,000 for
the same period in 1998. The increase was primarily due to the depletion of
all net operating loss carryforwards.
Comparison of Financial Condition at March 31, 1999 and December 31, 1998
Assets. Total assets at March 31, 1999 were $135.7 million compared to $126.8
million at December 31, 1998, an increase of $8.9 million or 7%. The increase
was primarily due to increases in investment securities available for sale
and federal funds sold.
Federal Funds Sold. Total federal funds sold at March 31, 1999 were $8.5
million compared to $4.0 million at December 31, 1998, an increase of $4.5
million or 113%. The increase was primarily due to the increase in deposits
in March 1999.
Mortgage Loans Held for Sale. Total mortgage loans held for sale at March 31,
1999 were $413,000 compared to $1,211,000 at December 31, 1998, a decrease of
$798,000 or 66%. This decrease was primarily due to the decrease in loan
volume.
11
Investment Securities - Available for Sale. Total investment securities -
available for sale, at March 31, 1999 were $53.9 million compared to
approximately $50.2 million at December 31, 1998, an increase of $3.7 million
or 7%. An increase in 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, corporate debt securities carrying
ratings of Aa2 or better or munipal obligations carrying ratings of Aaa 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):
March 31, 1999
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
US Treasury securities $ 2,003 $ -- $ (1) $ 2,002
US Government agency securities 46,765 8 (101) 46,672
Municipal bonds 125 -- -- 125
Corporate debt securities 5,100 -- -- 5,100
------- ----- ------- -------
Totals $53,993 $ 8 $ (102) $53,899
======= ===== ======= =======
December 31, 1999
---------------------------------------------
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
======= ===== ======= =======
12
Loans. Total loans at March 31, 1999 were $67.1 million compared to $66.0
million at December 31, 1998, an increase of $1.1 million or 2%. Major
categories of loans included in the loan portfolio are as follows (in
thousands):
03/31/99 12/31/98 03/31/98
-------- -------- --------
Consumer loans $ 11,162 $ 12,434 $ 12,818
Commercial, financial, & other 17,927 14,843 10,556
Commercial real estate construction 3,092 2,619 2,023
Commercial real estate mortgages 11,898 12,478 10,796
Residential real estate mortgages 23,057 23,649 17,977
-------- -------- --------
67,136 66,023 54,170
Allowance for possible credit losses (705) (627) (541)
-------- -------- --------
$ 66,431 $ 65,396 $ 53,629
======== ======== ========
The following is a summary of non-performing assets and problems loans (in
thousands):
03/31/99 12/31/98 03/31/98
-------- -------- --------
Over 90 days past due and still accruing $ 141 $ 2 $ 97
Non-accrual loans 885 410 20
Renegotiated loans -- -- --
Other real estate owned -- -- --
-------- -------- --------
$ 1,026 $ 412 $ 117
======== ======== ========
13
Allowance for Possible Credit Losses. The allowance for possible credit
losses at March 31, 1999 was $706,000 compared to $627,000 at December 31,
1998, an increase of $79,000 or 13%. The increase in the allowance for
possible credit losses was based upon management's assessment of relevant
factors, including types and amounts of non-performing loans, historical and
anticipated loss experience on such types of loans, and current and projected
economic conditions.
The following is an analysis of the allowance for possible credit losses (in
thousands):
03/31/99 3/31/98
-------- -------
Balance, beginning of year $627 $522
Charge-offs:
Consumer Loans 3 3
---- ----
Net charge-offs 3 3
Additions charged to operations 82 22
---- ----
Balance, March 31 $706 $541
==== ====
Allowance to total loans 1.05% 1.00%
==== ====
Net charge-offs to average loans 0.01% 0.01%
==== ====
Bank Premises and Equipment. Bank premises and equipment at March 31, 1999
was $2.3 million compared to 2.4 million at December 31, 1998, a decrease of
$0.1 million or 4%. Purchases of bank premises and equipment during the
period were offset by accumulated depreciation.
Accrued Interest Receivable. Accrued interest receivable at March 31, 1999
was $903,000 compared to $933,000 at December 31, 1998, a decrease of $30,000
or 3%. The decrease was primarily due to the timing of semi-annual interest
payments accrued on investments securities - available for sale.
Other Assets. Other assets at March 31, 1999 were $449,000 compared to
$372,000 at December 31, 1998, an increase of $77,000 or 21%. The increase
was primarily due to increases in prepaid expenses.
14
Deposits. Total deposits at March 31, 1999 were $106.5 million compared to
$97.6 million at December 31, 1998, an increase of $8.9 million or 9%. The
following is a summary of the distribution of deposits (in thousands):
03/31/99 12/31/98 03/31/98
-------- -------- --------
Non-interest bearing:
Demand $12,402 $11,142 $12,288
------- ------- -------
Interest bearing:
Checking $ 3,381 $ 3,630 $ 1,463
Money market 14,783 11,215 11,263
Savings 2,472 2,079 1,904
Time, under $100,000 45,137 42,790 43,497
Time, $100,000 and over
Non-volatile priced 13,336 13,493 14,928
Volatile priced 15,037 13,261 9,713
------- ------- -------
$94,146 $86,468 $82,768
======= ======= =======
The increase in deposits was primarily due to normal business development,
marketing, telemarketing, referral programs and growth strategies which
included, an annual birthday celebration and major marketing campaign in
March. The increase in deposits enabled the Corporation to invest the funds
in loans, federal funds sold and investment securities - available for sale.
Accrued Interest Payable. Accrued interest payable at March 31, 1999 was
$377,000 compared to $338,000 at December 31, 1998, an increase of $39,000 or
12%. The increase was due to the increase in the volume of time deposits.
15
Capital
Stockholders' equity at March 31, 1999 was $27.9 million compared to $27.7
million as of December 31, 1998, an increase of $0.2 million or 1%. The
following is a presentation of the Bank's regulatory capital ratios (in
thousands):
Minimum For Capital Minimum
Actual Adequacy Purposes To Be Well Capitalized
-------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- ------------------- ---------------------
As of March 31, 1999
Total capital
(to risk weighted assets) 10,765 14.81% 5,816 8.00% 7,270 10.00%
Tier 1 capital
(to risk weighted assets) 10,059 13.84% 2,908 4.00% 4,362 6.00%
Tier 1 capital
(to average assets) 10,059 9.19% 4,378 4.00% 5,472 5.00%
As of December 31, 1998
Total capital
(to risk weighted assets) 10,622 16.10% 5,245 8.00% 6,557 10.00%
Tier 1 capital
(to risk weighted assets) 9,995 15.00% 2,623 4.00% 3,934 6.00%
Tier 1 capital
(to average assets) 9,995 9.10% 4,438 4.00% 5,547 5.00%
Based on the respective regulatory capital ratios at March 31, 1999 and
December 31, 1998, 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 1,407,600 shares of stock at a price of $13.73 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.
16
The Corporation has sought to manage its exposure to changes in interest
rates by matching more closely the effective maturities or repricing
characteristics of the Corporation's interest-earning assets and
interest-bearing liabilities. The matching of the asset and liabilities may
be analyzed by examining the extent to which the assets and liabilities are
interest rate sensitive and by monitoring the expected effects of interest
rate changes on net interest income.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the
Corporation's assets mature or reprice more quickly or to a greater extent
that its liabilities, the Corporation's net portfolio value and net interest
income would tend to increase during periods of rising interest rates but
decrease during periods of falling interest rates. If the Corporation's
assets mature or reprice more slowly or to a lesser extent than its
liabilities, its net portfolio value and net interest income would tend to
decrease during periods of rising interest rates but increase during periods
of falling interest rates.
Interest Rate Sensitivity Analysis. The matching of assets and liabilities
may be analyzed by examining the extent to which such assets and liabilities
are "interest rate sensitive" and by monitoring an institution's interest
rate sensitivity "gap." An asset or liability is said to be interest rate
sensitive within a specific period if it will mature or reprice within that
period. The interest rate sensitivity "gap" is the difference between the
amount of interest-earning assets maturing or repricing within a specific
time period and the amount of interest-bearing liabilities maturing or
repricing within that time period. A gap is considered positive when the
amount of interest rate sensitive assets exceeds the amount of interest rate
sensitive liabilities, and is considered negative when the amount of interest
rate sensitive liabilities exceed the amount of interest rate sensitive
assets. During a period of rising interest rates, a negative gap would be
expected to adversely affect net interest income while a positive gap would
be expected to result in an increase in net interest income, while conversely
during a period of declining interest rates, a negative gap would be expected
to result in an increase in net interest income and a positive gap would be
expected to adversely affect net interest income.
Different types of assets and liabilities with the same or similar maturities
may react differently to changes in overall market rates or conditions, and
thus changes in interest rates may affect net interest income positively or
negatively even if an institution were perfectly matched in each maturity
category. Additionally, the gap analysis does not consider the many factors
as banking interest rates move. While the interest rate sensitivity gap is a
useful measurement and contributes toward effective asset and liability
management, it is difficult to predict the effect of changing interest rates
solely on that measure, without accounting for alterations in the maturity or
repricing characteristics of the balance sheet that occur during changes in
market interest rates. During periods of rising interest rates, the
Corporation's assets tend to have prepayments that are slower than those in
an interest rate sensitivity gap and would increase the negative gap
position. Conversely, during a period of declining interest rates, the
Corporation's assets would tend to prepay faster than originally expected
thus decreasing the negative gap position. In addition, some of the
Corporation's assets, such as adjustable rate mortgages, have caps on the
amount by which their interest rates can change in any single period, and
therefore may not reprice as quickly as liabilities in the same maturity
category.
17
The following table set forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 1999 which are expected
to mature or reprice in each of the time periods shown (in thousands):
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 $ 8,542 $ -- $ -- $ -- $ 8,542
Mortgage loans held for sale 413 -- -- -- 413
Securities available for sale 7,102 -- 46,796 -- 53,898
Total loans, net of non-accrual 16,687 6,674 38,553 5,222 67,136
-------- -------- -------- -------- --------
Total earning assets 32,744 6,674 85,349 5,222 129,989
Interest bearing liabilities
Total interest bearing deposits 17,187 41,268 35,691 -- 94,146
Mortgage payable -- -- -- 511 511
-------- -------- -------- -------- --------
Total interest bearing liabilities 17,187 41,268 35,691 511 94,657
Net asset (liability) funding gap 15,557 (34,594) 49,658 4,711 $ 35,332
-------- -------- -------- -------- ========
Cumulative net asset (liability)
funding gap $ 15,557 $(19,037) $ 30,621 $ 35,332
======== ======== ======== ========
18
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., "99"
rather than "1999"). 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 was essentially complete on December 31, 1998. The current
phase of the plan is contingency planning and validation. 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 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 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.
DEARBORN BANCORP, INC.
FORM 10-Q (continued)
PART 2 - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS IN FORM 8-K.
(a) Financial Statements:
The following consolidated financial statements of Dearborn Bancorp,
Inc. and its subsidiary included in this report are:
Consolidated Balance Sheets - March 31, 1999, December 31, 1998 and
March 31, 1998
Consolidated Statements of Income - For the Three Months Ended March
31, 1999 and 1998
Consolidated Statements of Comprehensive Income - For the Three
Months Ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows - For the Three Months Ended
March 31, 1999 and 1998
Notes to Consolidated Financial Statements
(b) A Form 8-K Report was not filed during the three months ended
March 31, 1999.
20
DEARBORN BANCORP, INC.
FORM 10-Q (continued)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dearborn Bancorp, Inc.
(Registrant)
/s/ John E. Demmer
-------------------------------
John E. Demmer
Chairman and Chief Executive Officer
/s/ Michael J. Ross
-------------------------------
Michael J. Ross
President
/s/ Jeffrey L. Karafa
-------------------------------
Jeffrey L. Karafa
Treasurer and Chief Financial Officer
Date: May 5, 1999