1
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 June 30, 2000.
--------------
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
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(Address of principal executive office) (Zip Code)
(313) 274-1000
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(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 July 31, 2000.
Class Shares Outstanding
----- -------------------
Common Stock 2,385,675
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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
----
Independent Accountants' Report 3
Consolidated Balance Sheets - June 30, 2000, December 31, 1999
and June 30, 1999 4
Consolidated Statements of Income (Loss) - For the Three and
Six Months Ended June 30, 2000 and 1999 5
Consolidated Statements of Comprehensive Income (Loss) - For
the Three and Six Months Ended June 30, 2000 and 1999 6
Consolidated Statements of Cash Flows - For the
Six Months Ended June 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Liquidity and Capital 10-22
Part II. Other Information:
Pursuant to SEC rules and regulations, the following item(s) are
included with the Form 10-Q Report:
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K 23-24
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 5. Other Information
SIGNATURES 25
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3
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Dearborn Bancorp, Inc.
Dearborn, Michigan
We have reviewed the consolidated balance sheet of Dearborn Bancorp, Inc. as of
June 30, 2000, and the related consolidated statements of income and
comprehensive income for the three and six month periods ended June 30, 2000 and
1999 and the related consolidated statements of cash flows for the six month
periods ended June 30, 2000 and 1999. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Grand Rapids, Michigan
August 7, 2000
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DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars, in thousands)
06/30/00 12/31/99 06/30/99
-------------- ------------- ---------------
ASSETS
Cash and cash equivalents
Cash and due from banks $2,866 $2,446 $2,281
Federal funds sold 3,849 4,963 3,009
-------------- ------------- ---------------
Total cash and cash equivalents 6,715 7,409 5,290
Mortgage loans held for sale 2,384 783 647
Investment securities, available for sale 58,967 55,022 60,814
Federal Home Loan Bank stock 381 381 ---
Loans
Loans 102,662 85,390 73,850
Allowance for possible credit losses (1,007) (781) (707)
-------------- ------------- ---------------
Net loans 101,655 84,609 73,143
Premises and equipment, net 2,692 2,388 2,375
Accrued interest receivable 1,435 1,370 1,408
Other assets 544 736 824
-------------- ------------- ---------------
Total assets $174,773 $152,698 $144,501
============== ============= ===============
LIABILITIES
Deposits
Non-interest bearing deposits $21,202 $14,859 $14,798
Interest bearing deposits 124,718 104,016 101,053
-------------- ------------- ---------------
Total deposits 145,920 118,875 115,851
Other liabilities
Federal funds purchased --- 3,000 ---
Federal Home Loan Bank advances --- 2,000 ---
Mortgage payable 480 493 505
Accrued interest payable 556 469 391
Other liabilities 385 601 387
-------------- ------------- ---------------
Total liabilities 147,341 125,438 117,134
STOCKHOLDERS' EQUITY
Common stock - 5,000,000 shares authorized,
2,391,759 and 2,442,740 shares outstanding at
June 30, 2000 and December 31, 1999, respectively 28,469 28,822 29,015
Accumulated deficit (214) (740) (1,234)
Accumulated other comprehensive loss, net of taxes (823) (822) (414)
-------------- ------------- ---------------
Total stockholders' equity 27,432 27,260 27,367
Total liabilities and stockholders' equity $174,773 $152,698 $144,501
============== ============= ===============
The accompanying notes are an integral part of these consolidated financial
statements.
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DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME(LOSS) (UNAUDITED)
(In thousands, except share data) Three Months Ended Six Months Ended
06/30/00 06/30/99 06/30/00 06/30/99
------------ ------------ ----------- -----------
Interest income
Interest on loans $2,207 $1,504 $4,116 $2,913
Interest on investment securities, available for sale 821 867 1,615 1,518
Interest on federal funds and deposits with banks 113 63 135 139
------------ ------------ ----------- -----------
Total interest income 3,141 2,434 5,866 4,570
Interest expense
Interest on deposits 1,605 1,189 2,926 2,241
Interest on other borrowings 20 8 80 17
------------ ------------ ----------- -----------
Total interest expense 1,625 1,197 3,006 2,258
Net interest income 1,516 1,237 2,860 2,312
Provision for possible credit losses 125 585 240 667
------------ ------------ ----------- -----------
Net interest income after provision for possible credit losses 1,391 652 2,620 1,645
------------ ------------ ----------- -----------
Non-interest income
Service charges on deposit accounts 52 48 110 89
Fees for other services to customers 7 7 13 14
Gain on the sale of loans 76 79 137 179
Other income 2 1 1 1
------------ ------------ ----------- -----------
Total non-interest income 137 135 261 283
Non-interest expenses
Salaries and employee benefits 672 547 1,263 1,073
Occupancy and equipment expense 112 107 259 214
Advertising and marketing 40 38 71 56
Stationery and supplies 36 51 78 83
Professional services 51 87 116 140
Data processing 46 47 81 83
FDIC insurance premiums 6 3 12 6
Other operating expenses 87 100 203 197
------------ ------------ ----------- -----------
Total non-interest expenses 1,050 980 2,083 1,852
Income (loss) before income tax provision 478 (193) 798 76
Income tax provision 163 (53) 272 40
------------ ------------ ----------- -----------
Net income (loss) $315 ($140) $526 $36
============ ============ =========== ===========
Per share data:
Net income - basic and diluted $0.13 ($0.06) $0.22 $0.01
Weighted average number of shares outstanding - basic 2,397,701 2,473,295 2,410,533 2,473,295
Weighted average number of shares outstanding - diluted 2,398,756 2,473,295 2,410,533 2,477,588
The accompanying notes are an integral part of these consolidated financial
statements.
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DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In thousands) Three Months ended Six Months Ended
06/30/00 06/30/99 06/30/00 06/30/99
---------- ---------- ---------- ----------
Net income (loss) $315 ($140) $526 $36
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during period 260 (532) (1) (606)
Less: reclassification adjustment for gains included
in net income --- --- --- ---
Tax effects (88) 181 --- 206
---------- ---------- ---------- ----------
Other comprehensive income (loss) 172 (351) --- (400)
---------- ---------- ---------- ----------
Comprehensive income (loss) $487 ($491) $525 ($364)
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
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DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands) Six Months Ended Six Months Ended
6/30/00 6/30/99
------------------- -------------------
Cash flows from operating activities
Interest and fees received $5,801 $4,198
Interest paid (2,919) (2,205)
Taxes paid (237) (435)
Proceeds from sale of mortgages held for sale 9,400 11,626
Origination of mortgages held for sale (11,001) (10,873)
Cash paid to suppliers and employees (1,692) (1,813)
------------------- -------------------
Net cash provided by (used in) operating activities (648) 498
Cash flows from investing activities
Proceeds from maturities of securities available for sale --- 29,952
Proceeds from sales of securities available for sale --- 2,400
Purchases of securities available for sale (4,000) (43,497)
Increase in loans, net of payments received (17,286) (8,425)
Purchases of property and equipment (438) (121)
------------------- -------------------
Net cash (used in) investing activities (21,724) (19,691)
Cash flows from financing activities
Net increase in non-interest bearing deposits 6,343 3,656
Net increase in interest bearing deposits 20,702 14,585
Decrease in federal funds purchased (3,000) ---
Increase in Federal Home Loan Bank advances (2,000) ---
Principal payments on mortgage payable (13) (12)
Purchase of treasury stock (354) ---
------------------- -------------------
Net cash provided by financing activities 21,678 18,229
Decrease in cash and cash equivalents (694) (964)
Cash and cash equivalents at the beginning of the period 7,409 6,254
------------------- -------------------
Cash and cash equivalents at the end of the period $6,715 $5,290
=================== ===================
Reconciliation of net income to net cash provided by
(used in) operating activities
Net income $526 $36
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Provision for possible credit losses 240 667
Depreciation and amortization expense 134 213
Accretion of discount on investment securities (3) (2)
Amortization of premium on investment securities 58 66
(Increase) decrease in mortgages held for sale (1,601) 564
(Increase) in interest receivable (65) (475)
Increase (decrease) in interest payable 87 53
(Increase) decrease in other assets 192 (452)
(Decrease) in other liabilities (216) (172)
------------------- -------------------
Net cash provided by (used in) operating activities ($648) $498
=================== ===================
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The accompanying notes are an integral part of these consolidated financial
statements.
DEARBORN BANCORP, INC. AND SUBSIDIARY
FORM 10-Q (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting and Reporting Policies
The consolidated 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 consolidated financial statements of the Corporation as of June 30,
2000 and December 31, 1999 and for the three and six month periods ended
June 30, 2000 and 1999 reflect all adjustments, consisting of normal
recurring items which are in the opinion of management, necessary for a
fair presentation of the results for the interim period. The 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 interim 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 1999 Annual
Report to Stockholders on Form 10-K.
B. STOCK OPTION PLAN
Options to buy common stock are granted to officers and employees under a
Stock Option Plan which provides for issue of up to 500,000 shares.
Exercise price is the market price at date of grant. The maximum option
term is ten years, and options vest fully after six months from the date
of grant. If an option expires or terminates without having been
exercised, such option becomes available for future grant under the Plan.
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A summary of the option activity is as follows:
Weighted
Weighted Average Fair
Available Average Value of
for Options Exercise Options
Grant Outstanding Price Granted
----- ----------- ----- -------
Outstanding at January 1, 1998 208,998 46,002 $ 8.91
Granted (33,150) 33,150 12.75 6.28
------------- ------------- -------------
Outstanding at December 31, 1998 175,848 79,152 10.52
Granted (71,000) 71,000 11.23 4.01
------------- ------------- -------------
Outstanding at December 31, 1999 104,848 150,152 10.85
Authorized for Future Grant 245,000 --- ---
Granted (69,500) 69,500 6.93 3.15
Forfeited 2,000 (2,000) 9.22
------------- ------------- -------------
Outstanding at June 30, 2000 282,348 217,652 $9.61
============= ============= =============
For the options outstanding at June 30, 2000, the range of exercise prices
was $6.81 to $12.75 per share with a weighted-average remaining
contractual term of 8.3 years. At June 30, 2000, 149,152 options were
exercisable at weighted average exercise prices of $10.85 per share.
Had compensation cost for stock options been measured using the fair value
method of FASB Statement No. 123, net income and earnings per share would
have been the pro forma amounts indicated below for the six months ended
June 30, 2000 and 1999 (in thousands, except per share data). The pro
forma effects may increase in the future if more options are granted.
For the Six Months Ended June 30,
2000 1999
----------------------- ------------------------
Net income
As reported $526 $36
Pro forma 351 (187)
Basic and diluted income per share
As reported $0.22 $0.01
Pro forma 0.15 (0.08)
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The pro forma effects are computed with option pricing models, using the
following weighted average assumptions as of grant date.
2000 1999
------------------ -------------------
Risk-free interest rate 6.73% 4.94%
Expected option life 9 years 9 years
Dividend yield 0.00% 0.00%
Expected volatility of stock price 33.45% 33.45%
All share and per share amounts have been adjusted for stock dividends.
PART I - FINANCIAL INFORMATION
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis are intended to address significant
factors affecting the financial condition and results of operations of the
Corporation. The discussion provides a more comprehensive review of the
financial position and operating results than can be obtained from a reading of
the financial statements and footnotes presented elsewhere in this report.
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that are based on management's
beliefs, assumptions, current expectations, estimates and projections about the
financial services industry, the economy, and about the Corporation and Bank.
Words such as "anticipates", "believes", "estimates", "expects", "forecasts",
"intends", "is likely", "plans", "projects", variations of such words and
similar expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions ("Future Factors") that are difficult to
predict with regard to timing, extent, likelihood and degree of occurrence.
Therefore, actual results and outcomes may materially differ from what may be
expressed or forecasted in such forward-looking statements. The Corporation
undertakes no obligation to update, amend or clarify forward-looking statements,
whether as a result of new information, future events (whether anticipated or
unanticipated), or otherwise.
Future Factors include changes in interest rates and interest rate
relationships; demand for products and services; the degree of competition by
traditional and non-traditional competitors; changes in banking regulation;
changes in tax laws; changes in prices, levies and assessments; the impact of
technological advances; governmental and regulatory policy changes; the outcomes
of contingencies; trends in customer behavior as well as their ability to repay
loans; and changes in the national and local economy. These are representative
of the Future Factors that could cause a difference between an ultimate actual
outcome and a preceding forward-looking statement.
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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. The Bank is in the process of constructing an office,
located at 1325 N. Canton Center Road, Canton Township, Michigan, which is
expected to open in the first quarter of 2001.
RESULTS OF OPERATIONS
The Corporation reported net income of $315,000 and $526,000 for the three and
six month periods ended June 30, 2000, compared to a net loss of $140,000 for
the three-month period and net income of $36,000 for the six month period ended
June 30, 1999. The increase in net income was primarily due to the positive
impact of net interest income due primarily to significant growth in the volume
of loans, partially offset by growth in deposits. The reported net income for
the three and six month periods ended June 30, 1999 was negatively impacted by a
charge-off in the amount of $543,000 due to the bankruptcy of a commercial
borrower.
NET INTEREST INCOME
2000 Compared to 1999. Net interest income for the three month period ended June
30, 2000 was $1,516,000 compared to $1,237,000 for the same period ended June
30, 1999, an increase of $279,000 or 23%. This increase was caused primarily by
an increase in average earning assets of $25.0 million between the periods while
interest-bearing liabilities grew by $22.9 million. At the same time the
Corporation's interest rate spread increased to 2.54% in 2000 from 2.36% in
1999. The Corporation's net interest margin increased in 2000 to 3.78% from
3.59% in 1999. The Corporation's increase in interest rate spread and net
interest margin was primarily a result of growth in the loan and investment
securities portfolios in an increasing interest rate environment.
Net interest income for the six month period ended June 30, 2000 was $2,860,000
compared to $2,312,000 for the same period ended June 30, 1999, an increase of
$548,000 or 24%. This increase was caused primarily by an increase in average
earning assets of $24.6 million between the periods while interest-bearing
liabilities grew by $22.5 million. At the same time the Corporation's interest
rate spread increased to 2.49% in 2000 from 2.27% in 1999. The Corporation's net
interest margin increased in 2000 to 3.73% from 3.53% in 1999. The Corporation's
increase in interest rate spread and net interest margin was primarily a result
of growth in the loan portfolio in an increasing interest rate environment.
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Average Balances, Interest Rates and Yields. Net interest income is affected by
the difference ("interest rate spread") between rates of interest earned on
interest-earning assets and rates of interest paid on interest-bearing
liabilities and the relative amounts of interest-bearing liabilities and
interest-earning assets. When the total of interest-earning assets approximates
or exceeds the total of interest-bearing liabilities, any positive interest rate
spread will generate net interest income. Financial institutions have
traditionally used interest rate spreads as a measure of net interest income.
Another indication of an institution's net interest income is its "net yield on
interest-earning assets" or "net interest margin," which is net interest income
divided by average interest-earning assets.
The following table sets forth certain information relating to the Corporation's
consolidated average interest-earning assets and interest-bearing liabilities
and reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average daily balance of assets or liabilities, respectively, for
the periods presented. During the periods indicated, non-accruing loans, if any,
are included in the loan category.
Three months ended June 30, Three months ended June 30,
2000 1999
------------------------------ -----------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
---------- -------- --------- ----------- -------- --------
Assets
Federal funds sold and interest
bearing deposits with banks $7,182 $113 6.33% $4,613 $63 5.40%
Investment securities, available for sale 56,713 821 5.82% 60,180 867 5.70%
Loans 97,472 2,207 9.11% 71,539 1,504 8.32%
---------- -------- --------- ----------- -------- --------
Sub-total earning assets 161,367 3,141 7.83% 136,332 2,434 7.06%
Other assets 7,002 5,588
---------- -----------
Total assets $168,369 $141,920
========== ===========
Liabilities and stockholders' equity
Interest bearing deposits $122,349 $1,605 5.28% $100,243 $1,189 4.69%
Other borrowings 1,282 20 6.27% 507 8 6.24%
---------- -------- --------- ----------- -------- --------
Sub-total interest bearing liabilities 123,631 1,625 5.29% 100,750 1,197 4.70%
Non-interest bearing deposits 16,523 12,763
Other liabilities 1,106 867
Stockholders' equity 27,109 27,540
---------- -----------
Total liabilities and stockholders' equity $168,369 $141,920
========== ===========
Net interest income $1,516 $1,237
======== ========
Net interest rate spread 2.54% 2.36%
========= ========
Net interest margin on earning assets 3.78% 3.59%
========= ========
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Six months ended June 30, Six months ended June 30,
2000 1999
------------------------------- -------------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
---------- -------- --------- ---------- -------- ---------
Assets
Federal funds sold and interest
bearing deposits with banks $4,510 $135 6.02% $5,094 $139 5.43%
Investment securities, available for sale 55,925 1,615 5.81% 54,469 1,518 5.54%
Loans 93,561 4,116 8.85% 69,820 2,913 8.30%
---------- -------- --------- ---------- -------- ---------
Sub-total earning assets 153,996 5,866 7.66% 129,383 4,570 7.03%
Other assets 6,557 5,477
---------- ----------
Total assets $160,553 $134,860
========== ==========
Liabilities and stockholders' equity
Interest bearing deposits $114,236 $2,926 5.15% $93,884 $2,241 4.75%
Other borrowings 2,610 80 6.16% 511 17 6.62%
---------- -------- --------- ---------- -------- ---------
Sub-total interest bearing liabilities 116,846 3,006 5.17% 94,395 2,258 4.76%
Non-interest bearing deposits 15,595 11,967
Other liabilities 1,117 840
Stockholders' equity 26,995 27,658
---------- ----------
Total liabilities and stockholders' equity $160,553 $134,860
========== ==========
Net interest income $2,860 $2,312
======= =======
Net interest rate spread 2.49% 2.27%
======== ========
Net interest margin on earning assets 3.73% 3.53%
======== ========
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Rate/Volume Analysis. The following table analyzes net interest income in terms
of changes in the volume of interest-earning assets and interest-bearing
liabilities and changes in yields and rates. The table reflects the extent to
which changes in the interest income and interest expense are attributable to
changes in volume (changes in volume multiplied by prior year rate) and changes
in rate (changes in rate multiplied by prior year volume). Changes attributable
to the combined impact of volume and rate have been allocated proportionately to
changes due to volume and changes due to rate.
Three months ended Six months ended
June 30, 2000/1999 June 30, 2000/1999
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 $39 $11 $50 ($19) $15 ($4)
Investment securities, available for sale (65) 19 (46) 21 76 97
Loans 563 140 703 1,011 192 1,203
---------- --------- -------- ---------- --------- ---------
Total earning assets $537 $170 $707 $1,013 $283 $1,296
========== ========= ======== ========== ========= =========
Liabilities
Interest bearing deposits $270 $146 $416 $497 $188 $685
Other borrowings 12 --- 12 64 (1) 63
---------- --------- -------- ---------- --------- ---------
Total interest bearing liabilities $282 $146 $428 $561 $187 $748
========== ========= ======== ========== ========= =========
Net interest income $279 $548
======== =========
Net interest rate spread 0.18% 0.22%
======== =========
Net interest margin on earning assets 0.19% 0.20%
======== =========
PROVISION FOR POSSIBLE CREDIT LOSSES
2000 Compared to 1999. The provision for possible credit losses was $125,000 and
$240,000 for the three and six month periods ended June 30, 2000, compared to
$585,000 and $667,000 for the same period in 1999, a decrease of $460,000 or 79%
for the three month period and $427,000 or 64% for the six month period. The
provision for possible credit losses for the three and six month period ended
June 30, 1999 includes provision for the bankruptcy of a borrower, with whom the
Corporation participated in a lending relationship with a number of other
Michigan banks. 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.
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NON-INTEREST INCOME
2000 Compared to 1999. Non-interest income was $137,000 and $261,000 for the
three and six month periods ended June 30, 2000, compared to $135,000 and
$283,000 for the same periods in 1999, an increase of $2,000 or 1% for the three
month period and a decrease of $22,000 or 8% for the six month period. The
increase during the three month period was primarily due to an increase in
service charges on deposit accounts. The decrease during the six month period
was primarily due to a decrease in the sale of mortgage loans in an increasing
interest rate environment.
NON-INTEREST EXPENSE
2000 Compared to 1999. Non-interest expense was $1,050,000 and $2,083,000 for
the three and six month periods ended June 30, 2000, compared to $980,000 and
$1,852,000 for the same periods in 1999, an increase of $70,000 or 7% for the
three month period and $231,000 or 12% for the six month period. The largest
components of non-interest expense were salaries and employee benefits which
amounted to $672,000 and $1,263,000 and occupancy and equipment expense which
amounted to $112,000 and $259,000 for the three and six month periods ended June
30, 2000. For the same periods in 1999, salaries and employee benefits was
$547,000 and $1,073,000 and occupancy and equipment expense was $107,000 and
$214,000. The primary factor for the increase in salaries and employee benefits
was the addition of two executive officers and two mortgage loan originators, to
the Bank since June 30, 1999. As of both, June 30, 2000 and June 30, 1999, the
number of full time equivalent employees was 44. The increase in occupancy and
equipment expense was the result of general building maintenance in the first
quarter of 2000 and additional depreciation expense on equipment purchased as a
result of Year 2000 concerns during 1999.
INCOME TAX PROVISION
2000 Compared to 1999. The income tax expense was $163,000 and $272,000 for the
three and six month periods ended June 30, 2000, compared to an income tax
benefit of $53,000 and income tax expense of $40,000 for the same periods in
1999. The increase was a result of increased pre-tax income.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND DECEMBER 31, 1999
Assets. Total assets at June 30, 2000 were $174.8 million compared to $152.7
million at December 31, 1999, an increase of $22.1 million or 14%. The increase
was primarily due to increases in loan volume.
Federal Funds Sold. Total federal funds sold at June 30, 2000 were $3.8 million
compared to $5.0 million at December 31, 1999, a decrease of $1.2 million or
24%. The decrease was primarily due to the funding of new consumer, residential
real estate and commercial real estate loans.
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Mortgage Loans Held for Sale. Total mortgage loans held for sale at June 30,
2000 were $2.4 million compared to $783,000 at December 31, 1999, an increase of
$1.6 million or 207%. This increase was a result of timing differences in
secondary market funding.
Investment Securities - Available for Sale. Total investment securities -
available for sale, at June 30, 2000 were $59.0 million compared to $55.0
million at December 31, 1999, an increase of $4.0 million or 7%. The increase in
deposits has enabled the Corporation to invest in investment securities -
available for sale until such time as quality loan opportunities become
available. All securities within the Corporation's portfolio are U.S. Treasury
issues, U.S. Government sponsored agency issues, corporate debt securities
carrying ratings of Aa2 or better or municipal 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):
June 30, 2000
----------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------ ---------------- ------------------- --------------------
US Treasury securities $2,271 $--- ($67) $2,204
US Government agency securities 53,816 --- (1,176) 52,640
Municipal bonds 125 --- (2) 123
Corporate debt securities 4,000 --- --- 4,000
------------------ ---------------- ------------------- --------------------
Totals $60,212 $--- ($1,245) $58,967
================== ================ =================== ====================
December 31, 1999
----------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------ ---------------- ------------------- --------------------
US Treasury securities $2,320 $--- ($76) $2,244
US Government agency securities 53,822 --- (1,167) 52,655
Municipal bonds 125 --- (2) 123
------------------ ---------------- ------------------- --------------------
Totals $56,267 $--- ($1,245) $55,022
================== ================ =================== ====================
Federal Home Loan Bank Stock. Federal Home Loan Bank stock was valued at
$381,000 at June 30, 2000 and December 31, 1999.
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Loans. Total loans at June 30, 2000 were $102.7 million compared to $85.4
million at December 31, 1999, an increase of $17.3 million or 20% and $73.9
million at June 30, 1999, an increase of $28.8 million or 39%. Major categories
of loans included in the loan portfolio are as follows (in thousands):
06/30/00 12/31/99 06/30/99
------------------- ------------------- -------------------
Consumer loans $15,281 $10,967 $11,154
Commercial, financial, & other $22,097 20,563 20,607
Commercial real estate construction $2,742 3,656 3,272
Commercial real estate mortgages $33,866 23,103 14,092
Residential real estate mortgages $28,676 27,101 24,725
------------------- ------------------- -------------------
102,662 85,390 73,850
Allowance for possible credit losses (1,007) (781) (707)
------------------- ------------------- -------------------
$101,655 $84,609 $73,143
=================== =================== ===================
The following is a summary of non-performing assets and problems loans (in
thousands):
06/30/00 12/31/99 06/30/99
------------------- ------------------- -------------------
Over 90 days past due and still accruing $159 $190 $---
Non-accrual loans 442 105 287
Renegotiated loans --- --- ---
Other real estate owned --- --- ---
------------------- ------------------- -------------------
$601 $295 $287
=================== =================== ===================
Non-accrual loans at June 30, 2000 were $442,000, of which, $351,000 were well
secured by residential real estate. The increase in non-accrual loans consisted
of a $286,000 slow paying residential mortgage and a $65,000 residential
mortgage in bankruptcy proceedings.
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18
Allowance for Possible Credit Losses. The allowance for possible credit losses
at June 30, 2000 was $1.0 million compared to $781,000 at December 31, 1999, an
increase of $226,000 or 29%. The increase in the allowance for possible credit
losses was based upon management's assessment of relevant factors, including
loan growth, types and amounts of non-performing loans, historical and
anticipated loss experience on such types of loans, and current and projected
economic conditions.
The following is an analysis of the allowance for possible credit losses (in
thousands):
Six Months Ended Year Ended Six Months Ended
06/30/00 12/31/99 06/30/99
------------------- ------------------- -------------------
Balance, beginning of year $781 $627 $627
Charge-offs:
Consumer loans (16) (55) (55)
Commercial loans --- (584) (543)
Recoveries:
Consumer loans 2 21 11
------------------- ------------------- -------------------
Net charge-offs (14) (618) (587)
Additions charged to operations 240 772 667
------------------- ------------------- -------------------
Balance, end of period $1,007 $781 $707
=================== =================== ===================
Allowance to total loans 0.98% 0.91% 0.96%
=================== =================== ===================
Allowance to non-performing assets 167.55% 264.75% 125.80%
=================== =================== ===================
Net charge-offs to average loans 0.02% 0.84% 0.84%
=================== =================== ===================
Premises and Equipment. Bank premises and equipment at June 30, 2000 was $2.7
million compared to $2.4 million at December 31, 1999, an increase of $304,000
or 13%. The increase in premises and equipment was due to the purchase of land
for the Bank's Canton Township office.
Accrued Interest Receivable. Accrued interest receivable at June 30, 2000 was
$1.4 million compared to $1.4 million at December 31, 1999.
Other Assets. Other assets at June 30, 2000 were $544,000 compared to $736,000
at December 31, 1999, a decrease of $192,000 or 26%. The decrease was primarily
due to changes in deferred tax assets.
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Deposits. Total deposits at June 30, 2000 were $145.9 million compared to $118.9
million at December 31, 1999, an increase of $27 million or 23% and $115.9
million at June 30, 1999, an increase of $30 million or 26%. The following is a
summary of the distribution of deposits (in thousands):
06/30/00 12/31/99 06/30/99
------------------- ------------------- -------------------
Non-interest bearing:
Demand $21,202 $14,859 $14,798
=================== =================== ===================
Interest bearing:
Checking $5,122 $5,391 $4,307
Money market 18,467 13,013 13,439
Savings 6,625 3,109 2,998
Time, under $100,000 44,568 40,984 45,426
Time, $100,000 and over 49,936 41,519 34,883
------------------- ------------------- -------------------
$124,718 $104,016 $101,053
=================== =================== ===================
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 2000 and a
targeted deposit campaign in April 2000. The increase in deposits was used to
repay borrowed funds and to fund loans.
During the month of June 2000, the Bank intentionally ran off approximately $5.2
million in Time Deposits. At June 30, 2000, approximately $4 million of the
closed time deposits were included in Demand Deposits in the form of Official
Bank Checks waiting to be cleared.
Federal Funds Purchased. Federal funds purchased at June 30, 2000 were $0.0
million compared to $3.0 million at December 31, 1999, a decrease of $3.0
million. Federal Funds purchased were replaced with funds acquired from
increases in deposits during April 2000.
Federal Home Loan Bank Advances. Federal Home Loan Bank advances at June 30,
2000 were $0.0 million compared to $2.0 million at December 31, 1999, a decrease
of $2.0 million. Federal Home Loan Bank advances were replaced with funds
acquired from increases in deposits during April 2000.
Mortgage Payable. Mortgage payable at June 30, 2000 was $480,000 compared to
$493,000 at December 31, 1999, a decrease of $13,000 or 3%. The decrease in
mortgage payable was a result of making standard monthly payments.
Accrued Interest Payable. Accrued interest payable at June 30, 2000 was $556,000
compared to $469,000 at December 31, 1999, an increase of $87,000 or 19%. The
increase was due to the increase in the volume of time deposits.
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20
Other Liabilities. Other liabilities at June 30, 2000 were $385,000 compared to
$601,000 at December 31, 1999, a decrease of $216,000 or 36%. The decrease was
primarily due to changes in deferred tax liabilities.
CAPITAL
Stockholders' equity at June 30, 2000 was $27.4 million compared to $27.3
million as of December 31, 1999, an increase of $172,000 or 1%. In November of
1999, the Corporation announced that it would repurchase up to 125,000 shares of
its outstanding common stock at a price range of $5.00 to $13.00 per share,
which represents approximately five percent of the outstanding common stock.
Through June 30, 2000, the Corporation was able to repurchase 81,354 shares
within Securities and Exchange Commission guidelines primarily related to the
volume of market activity. Considering that the Corporation's stock closed at
$6.750 per share on June 30, 2000, representing a 59 percent market to book
ratio, management believes that its stock is highly undervalued. The Corporation
will continue to repurchase shares during 2000.
The following is a presentation of the Corporation's and Bank's regulatory
capital ratios (in thousands):
Minimum
To Be Well Capitalized
Minimum for Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ------------------------ ---------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------- ------------------------ ---------------------------
As of June 30, 2000
Total capital
(to risk weighted assets)
Consolidated 29,262 30.2% 7,749 8.0% 9,687 10.0%
Bank 14,417 15.2% 7,604 8.0% 9,504 10.0%
Tier 1 capital
(to risk weighted assets)
Consolidated 28,255 29.2% 3,875 4.0% 5,812 6.0%
Bank 13,410 14.1% 3,802 4.0% 5,703 6.0%
Tier 1 capital
(to average assets)
Consolidated 28,255 16.8% 6,735 4.0% 8,418 5.0%
Bank 13,410 8.8% 6,128 4.0% 7,661 5.0%
As of December 31, 1999
Total capital
(to risk weighted assets)
Consolidated 28,864 32.1% 7,193 8.0% 8,992 10.0%
Bank 12,878 15.1% 6,824 8.0% 8,531 10.0%
Tier 1 capital
(to risk weighted assets)
Consolidated 28,083 31.2% 3,597 4.0% 5,395 6.0%
Bank 12,097 14.2% 3,412 4.0% 5,118 6.0%
Tier 1 capital
(to average assets)
Consolidated 28,083 19.2% 5,860 4.0% 7,325 5.0%
Bank 12,097 9.2% 5,255 4.0% 6,568 5.0%
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21
Based on the respective regulatory capital ratios at June 30, 2000 and December
31, 1999, the Corporation and Bank are considered well capitalized.
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.
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 assets and liabilities may be analyzed by examining the
extent to which the assets and liabilities are interest rate sensitive and by
monitoring the expected effects of interest rate changes on net interest income.
An asset or liability is interest rate sensitive within a specific time period
if it will mature or reprice within that time period. If the Corporation's
assets mature or reprice more quickly or to a greater extent that its
liabilities, the Corporation's net portfolio value and net interest income would
tend to increase during periods of rising interest rates but decrease during
periods of falling interest rates. If the Corporation's assets mature or reprice
more slowly or to a lesser extent than its liabilities, its net portfolio value
and net interest income would tend to decrease during periods of rising interest
rates but increase during periods of falling interest rates.
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.
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22
Different types of assets and liabilities with the same or similar maturities
may react differently to changes in overall market rates or conditions, and thus
changes in interest rates may affect net interest income positively or
negatively even if an institution were perfectly matched in each maturity
category. Additionally, the gap analysis does not consider the many factors as
banking interest rates move. While the interest rate sensitivity gap is a useful
measurement and contributes toward effective asset and liability management, it
is difficult to predict the effect of changing interest rates solely on that
measure, without accounting for alterations in the maturity or repricing
characteristics of the balance sheet that occur during changes in market
interest rates. During periods of rising interest rates, the Corporation's
assets tend to have prepayments that are slower than those in an interest rate
sensitivity gap and would increase the negative gap position. Conversely, during
a period of declining interest rates, the Corporation's assets would tend to
prepay faster than originally expected thus decreasing the negative gap
position. In addition, some of the Corporation's assets, such as adjustable rate
mortgages, have caps on the amount by which their interest rates can change in
any single period, and therefore may not reprice as quickly as liabilities in
the same maturity category.
The following table sets forth the amounts of interest earning assets and
interest bearing liabilities outstanding at June 30, 2000, which are expected to
mature or reprice in each of the time periods shown below. For the purposes of
this table, the maturity or repricing periods of other interest bearing deposits
are based upon industry experience as determined by the Corporation's
regulators. These rates are not the contractual repricing periods, which are
shorter than what is shown, as management has broad discretion in repricing
these deposits.
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 $3,849 $--- $--- $--- $3,849
Mortgage loans held for sale 2,384 --- --- --- 2,384
Securities available for sale 4,000 --- 54,967 --- 58,967
Federal Home Loan Bank stock 381 --- --- --- 381
Total loans, net of non-accrual 20,426 8,542 58,703 14,549 102,220
----------- ----------- ----------- ----------- ------------
Total earning assets 31,040 8,542 113,670 14,549 167,801
Interest bearing liabilities
Time deposits 23,800 46,224 24,480 --- 94,504
Other interest bearing deposits 3,357 10,072 16,785 --- 30,214
Mortgage payable --- --- --- 480 480
----------- ----------- ----------- ----------- ------------
Total interest bearing liabilities 27,157 56,296 41,265 480 125,198
Net asset (liability) funding gap 3,883 (47,754) 72,405 14,069 $42,603
----------- ----------- ----------- ----------- ============
Cumulative net asset (liability) funding gap $3,883 ($43,871) $28,534 $42,603
=========== =========== =========== ===========
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23
DEARBORN BANCORP, INC. AND SUBSIDIARY
FORM 10-Q (continued)
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
The Corporation held its regular annual meeting of stockholders on May 16,
2000. At this meeting, four directors were re-elected to serve three-year
terms expiring in 2003. The voting results for each nominee were as
follows:
Nominee Total For
------- ---------
David Himick 2,124,123
Jeffrey G. Longstreth 2,127,591
Michael J. Ross 2,125,551
Robert C. Schwyn 2,127,081
In addition, the stockholders were asked to approve one proposal.
A proposal to amend the 1994 stock option plan to make available an
additional 245,000 shares of common stock for issuance under the plan was
approved as follows: voted yes 1,317,336; voted no 129,455; abstained
50,242.
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 - June 30, 2000 (unaudited), December 31, 1999
and June 30, 1999
Consolidated Statements of Income (Loss) (unaudited) - For the Three and
Six Months Ended June 30, 2000 and 1999
Consolidated Statements of Comprehensive Income (Loss) (unaudited) - For
the Three and Six Months Ended June 30, 2000 and 1999
Consolidated Statements of Cash Flows (unaudited) - For the Six Months
Ended June 30, 2000 and 1999
Notes to Consolidated Financial Statements
23
24
DEARBORN BANCORP, INC. AND SUBSIDIARY
FORM 10-Q (continued)
(b) Exhibits
1994 Stock Option Plan, as Amended [10(b)]
Financial Data Schedule [27]
(c) A Form 8-K Report was not filed during the three months ended June 30,
2000.
24
25
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: August 10, 2000
25
26
Exhibit Index
Exhibit No. Description
- ----------- -----------
10(b) 1994 Stock Option Plan, as Amended
27 Financial Data Schedule