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 September 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
----------------------------------------------
(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 October 31, 2000.
Class Shares Outstanding
----- -------------------
Common Stock 2,335,644
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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 - September 30, 2000,
December 31, 1999 and September 30, 1999 4
Consolidated Statements of Income - For the Three and
Nine Months Ended September 30, 2000 and 1999 5
Consolidated Statements of Comprehensive Income (Loss) - For
the Three and Nine Months Ended September 30, 2000 and 1999 6
Consolidated Statements of Cash Flows - For the
Nine Months Ended September 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Liquidity and Capital 11-23
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 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 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
SIGNATURES 25
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INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
Dearborn Bancorp, Inc.
Dearborn, Michigan
We have reviewed the consolidated balance sheet of Dearborn Bancorp, Inc. as of
September 30, 2000, and the related consolidated statements of income and
comprehensive income for the three and nine month periods ended September 30,
2000 and 1999 and the related consolidated statements of cash flows for the nine
month periods ended September 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 financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Grand Rapids, Michigan
October 31, 2000
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4
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars, in thousands)
09/30/00 12/31/99 09/30/99
(unaudited) (audited) (unaudited)
------------ ---------- ------------
ASSETS
Cash and cash equivalents
Cash and due from banks $2,847 $2,446 $1,812
Federal funds sold 770 4,963 3,276
------------ ---------- ------------
Total cash and cash equivalents 3,617 7,409 5,088
Mortgage loans held for sale 2,488 783 1,128
Investment securities, available for sale 51,440 55,022 60,914
Federal Home Loan Bank stock 381 381 ---
Loans
Loans 113,943 85,390 75,624
Allowance for possible credit losses (1,127) (781) (750)
------------- ---------- ------------
Net loans 112,816 84,609 74,874
Premises and equipment, net 2,827 2,388 2,388
Accrued interest receivable 1,168 1,370 1,157
Other assets 392 736 822
------------ ---------- ------------
Total assets $175,129 $152,698 $146,371
============ ========== ============
LIABILITIES
Deposits
Non-interest bearing deposits $20,367 $14,859 $14,132
Interest bearing deposits 119,147 104,016 103,440
------------ ---------- ------------
Total deposits 139,514 118,875 117,572
Other liabilities
Federal funds purchased --- 3,000 ---
Federal Home Loan Bank advances 6,000 2,000 ---
Mortgage payable 473 493 499
Accrued interest payable 646 469 371
Other liabilities 529 601 502
------------ ---------- ------------
Total liabilities 147,162 125,438 118,944
STOCKHOLDERS' EQUITY
Common stock - 5,000,000 shares authorized,
2,373,001, 2,442,740 and 2,473,295 shares
outstanding at September 30, 2000, December
31, 1999 and September 30, 1999, respectively 28,340 28,822 29,015
Accumulated earnings (deficit) 116 (740) (1,010)
Accumulated other comprehensive loss (489) (822) (578)
------------ ----------- ------------
Total stockholders' equity 27,967 27,260 27,427
------------ ----------- ------------
Total liabilities and stockholders' equity $175,129 $152,698 $146,371
============ =========== ============
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 (UNAUDITED)
(In thousands, except share data) Three months ended Nine months ended
09/30/00 09/30/99 09/30/00 09/30/99
--------- ---------- ---------- ----------
Interest income
Interest on loans $2,493 $1,624 $6,609 $4,538
Interest on investment securities, available for sale 773 839 2,388 2,357
Interest on federal funds and deposits with banks 41 39 176 178
--------- ---------- ---------- ----------
Total interest income 3,307 2,502 9,173 7,073
Interest expense
Interest on deposits 1,693 1,231 4,619 3,472
Interest on other borrowings 43 9 123 26
--------- ---------- ---------- ----------
Total interest expense 1,736 1,240 4,742 3,498
Net interest income 1,571 1,262 4,431 3,575
Provision for possible credit losses 145 40 385 707
--------- ---------- ---------- ----------
Net interest income after provision for possible credit losses 1,426 1,222 4,046 2,868
--------- ---------- ---------- ----------
Non-interest income
Service charges on deposit accounts 49 53 159 142
Fees for other services to customers 11 7 24 21
Gain on the sale of loans 93 83 230 261
Gain (loss) on sale of investment securities (47) --- (47) ---
Other income 1 3 2 3
----------- ---------- ---------- ----------
Total non-interest income 107 146 368 427
Non-interest expenses
Salaries and employee benefits 675 574 1,938 1,647
Occupancy and equipment expense 114 112 373 329
Advertising and marketing 24 22 95 78
Stationery and supplies 33 48 111 153
Professional services 48 112 164 230
Data processing 42 41 123 124
FDIC insurance premiums 6 3 18 9
Other operating expenses 97 72 300 264
----------- ---------- ----------- ----------
Total non-interest expenses 1,039 984 3,122 2,834
Income before income tax provision 494 384 1,292 461
Income tax provision 163 161 435 201
----------- ---------- ----------- ----------
Net income $331 $223 $857 $260
=========== ========== =========== ==========
Per share data:
Net income - basic $0.14 $0.09 $0.36 $0.11
Net income - diluted $0.14 $0.09 $0.36 $0.10
Weighted average number of shares outstanding - basic 2,381,845 2,473,295 2,400,900 2,473,295
Weighted average number of shares outstanding - diluted 2,384,291 2,473,295 2,401,573 2,477,599
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)
Three months ended Nine months ended
(In thousands) 09/30/00 09/30/99 09/30/00 09/30/99
---------- ---------- ---------- ----------
Net income $331 $223 $857 $260
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during period 459 (248) 458 (855)
Plus: reclassification adjustment for losses included
in net income 47 --- 47 ---
Tax effects (172) 84 (172) 291
---------- ---------- ---------- ----------
Other comprehensive income (loss) 334 (164) 333 (564)
---------- ---------- ---------- ----------
Comprehensive income (loss) $665 $59 $1,190 ($304)
========== ========== ========== ==========
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) Nine months ended Nine months ended
9/30/00 9/30/99
--------------------- --------------------
Cash flows from operating activities
Interest and fees received $9,375 $6,849
Interest paid (4,565) (3,464)
Taxes paid (322) (280)
Proceeds from sale of mortgages held for sale 17,712 17,138
Origination of mortgages held for sale (19,187) (16,472)
Cash paid to suppliers and employees (2,624) (2,970)
--------------------- --------------------
Net cash provided by operating activities 389 801
Cash flows from investing activities
Proceeds from maturities of securities available for sale 4,000 29,952
Proceeds from sales of securities available for sale 3,962 2,400
Purchases of securities available for sale (4,000) (44,015)
Increase in loans, net of payments received (28,631) (10,047)
Purchases of property and equipment (649) (201)
--------------------- --------------------
Net cash (used in) investing activities (25,318) (21,911)
Cash flows from financing activities
Net increase in non-interest bearing deposits 5,508 2,990
Net increase in interest bearing deposits 15,131 16,972
Decrease in federal funds purchased (3,000) ---
Proceeds from Federal Home Loan Bank advances 10,000 ---
Repayment in Federal Home Loan Bank advances (6,000) ---
Principal payments on mortgage payable (20) (18)
Purchase of treasury stock ( 482) ---
--------------------- --------------------
Net cash provided by financing activities 21,137 19,944
Decrease in cash and cash equivalents (3,792) (1,166)
Cash and cash equivalents at the beginning of the period 7,409 6,254
--------------------- --------------------
Cash and cash equivalents at the end of the period $3,617 $5,088
===================== ====================
Reconciliation of net income to net cash provided by
operating activities
Net income $857 $260
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for possible credit losses 385 707
Depreciation and amortization expense 248 346
Accretion of discount on investment securities (5) (3)
Amortization of premium on investment securities 83 106
Loss on sale of investment securities 47 ---
(Increase) decrease in mortgages held for sale (1,705) 83
(Increase) decrease in interest receivable 202 (224)
Increase in interest payable 177 33
(Increase) decrease in other assets 172 (450)
(Decrease) in other liabilities (72) (57)
--------------------- --------------------
Net cash provided by operating activities $389 $801
===================== ====================
The accompanying notes are an integral part of these consolidated financial
statements.
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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 September
30, 2000 and December 31, 1999 and for the three and nine month periods
ended September 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 as of September 30, 2000 and for the
three and nine months ended September 30, 2000 and 1999 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.
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B. Adoption of New Accounting Standards
In June 1998, the Financial Accounting Standards Board (the FASB) issued
Statement No. 133 Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), subsequently amended by SFAS No. 137 and 138, which
the company is required to adopt effective January 1, 2001. SFAS 133 will
require the company to record all derivatives on the balance sheet at fair
value. Changes in derivative fair values will either be recognized in
earnings as offsets to the fair value of related hedged assets, liabilities
and firm commitments or, for forecasted transactions, deferred and recorded
as a component of other stockholders' equity until the hedged transactions
occur and are recognized in earnings. The inneffective portion of a hedging
derivative's change in fair value will be immediately recognized in
earnings. The impact of SFAS 133 on the company's financial statements will
depend on a variety of factors, including future interpretive guidance from
the FASB, the future level of forecasted and actual foreign currency
transactions, the extent of the company's hedging activities, the types of
hedging instruments used and the effectiveness of such instruments.
However, the company does not believe the effect of adopting SFAS 133 will
be material to its financial position.
C. 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.
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 September 30, 2000 282,348 217,652 $9.61
============= ============= =============
For the options outstanding at September 30, 2000, the range of
exercise prices was $6.81 to $12.75 per share with a weighted-average
remaining contractual term of 8.1 years. At September 30, 2000, 208,652
options were exercisable at weighted average exercise prices of $9.69
per share.
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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
nine months ended September 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 Nine Months Ended September 30,
2000 1999
------------------- ------------------------
Net income
As reported $857 $260
Pro forma 669 (13)
Basic income per share
As reported $0.36 $0.11
Pro forma 0.28 (0.01)
Diluted income per share
As reported 0.36 0.10
Pro forma 0.28 (0.01)
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.
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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 $331,000 and $857,000 for the three and
nine month periods ended September 30, 2000, compared to net income of $223,000
and $260,000 for the three and nine month periods ended September 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 nine month period
ended September 30, 1999 was negatively impacted by a charge-off in the amount
of $543,000 due to the bankruptcy of a commercial borrower. Management expects
net income to continue to increase in 2001 due to the continued growth in net
interest income and partially offset by the start-up costs of a new branch
office in Canton Township, Michigan.
NET INTEREST INCOME
2000 Compared to 1999. Net interest income for the three month period ended
September 30, 2000 was $1,571,000 compared to $1,262,000 for the same period
ended September 30, 1999, an increase of $309,000 or 24%. This increase was
caused primarily by an increase in average earning assets of $24.2 million
between the periods while interest-bearing liabilities grew by $19.3 million. At
the same time the Corporation's interest rate spread increased to 2.43% in 2000
from 2.40% in 1999. The Corporation's net interest margin increased in 2000 to
3.82% from 3.62% 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. The net interest margin was also
positively affected by the increase in non-interest bearing deposits.
Net interest income for the nine month period ended September 30, 2000 was
$4,431,000 compared to $3,575,000 for the same period ended September 30, 1999,
an increase of $856,000 or 24%. This increase was caused primarily by an
increase in average earning assets of $24.3 million between the periods while
interest-bearing liabilities grew by $21.4 million. At the same time the
Corporation's interest rate spread increased to 2.48% in 2000 from 2.32% in
1999. The Corporation's net interest margin increased in 2000 to 3.77% from
3.55% 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. The net interest margin was also
positively affected by the increase in non-interest bearing deposits.
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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 September 30, Three months ended September 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 $2,613 $41 6.24% $3,103 $39 5.03%
Investment securities, available for sale 53,005 773 5.80% 60,584 839 5.54%
Loans 107,961 2,493 9.19% 75,694 1,624 8.58%
-------- -------- ---------- ---------- -------- ---------
Sub-total earning assets 163,579 3,307 8.04% 139,381 2,502 7.18%
Other assets 7,775 6,059
-------- ---------
Total assets $171,354 $145,440
======== =========
Liabilities and stockholders' equity
Interest bearing deposits $120,602 $1,693 5.58% $103,230 $1,231 4.77%
Other borrowings 2,437 43 7.02% 510 9 7.06%
-------- ------- --------- --------- ------- ---------
Sub-total interest bearing liabilities 123,039 1,736 5.61% 103,740 1,240 4.78%
Non-interest bearing deposits 19,643 13,570
Other liabilities 1,028 857
Stockholders' equity 27,644 27,273
-------- ---------
Total liabilities and stockholders' equity $171,354 $145,440
======== =========
Net interest income $1,571 $1,262
======= =======
Net interest rate spread 2.43% 2.40%
========= =========
Net interest margin on earning assets 3.82% 3.62%
========= =========
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Nine months ended September 30, Nine months ended September 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 $3,880 $176 6.06% $4,423 $178 5.37%
Investment securities, available for sale 54,732 2,388 5.83% 56,530 2,357 5.56%
Loans 98,396 6,609 8.97% 71,800 4,538 8.43%
-------- ------- --------- --------- -------- ----------
Sub-total earning assets 157,008 9,173 7.80% 132,753 7,073 7.10%
Other assets 7,281 5,672
-------- ---------
Total assets $164,289 $138,425
======== =========
Liabilities and stockholders' equity
Interest bearing deposits $116,374 $4,619 5.30% $97,033 $3,472 4.77%
Other borrowings 2,554 123 6.43% 511 26 6.78%
-------- ------- --------- --------- -------- ----------
Sub-total interest bearing liabilities 118,928 4,742 5.33% 97,544 3,498 4.78%
Non-interest bearing deposits 16,954 12,507
Other liabilities 1,094 845
Stockholders' equity 27,313 27,529
-------- ---------
Total liabilities and stockholders' equity $164,289 $ 138,425
======== =========
Net interest income $4,431 $3,575
======= =======
Net interest rate spread 2.47% 2.32%
========= ==========
Net interest margin on earning assets 3.77% 3.60%
========= ==========
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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 Nine months ended
September 30, 2000/1999 September 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 ($7) $9 $2 ($17) $15 ($2)
Investment securities, available for sale (106) 40 (66) (48) 79 31
Loans 755 114 869 1,874 197 2,071
--------- ------- ------ -------- -------- --------
Total earning assets $642 $163 $805 $1,809 $291 $2,100
========= ======= ====== ======== ======== ========
Liabilities
Interest bearing deposits $252 $210 $462 $889 $258 $1,147
Other borrowings 34 --- 34 98 (1) $97
--------- ------- ------ -------- -------- --------
Total interest bearing liabilities $286 $210 $496 $987 $257 $1,244
========= ======= ====== ======== ======== ========
Net interest income $309 $856
====== ========
Net interest rate spread 0.03% 0.15%
====== ========
Net interest margin on earning assets 0.20% 0.17%
====== ========
PROVISION FOR POSSIBLE CREDIT LOSSES
2000 Compared to 1999. The provision for possible credit losses was $145,000 and
$385,000 for the three and nine month periods ended September 30, 2000, compared
to $40,000 and $707,000 for the same periods in 1999, an increase of $105,000 or
263% for the three month period and a decrease of $322,000 or 46% for the nine
month period. The provision for possible credit losses for the three month
period and nine month period ended September 30, 2000 reflects loan growth of
$11.3 million and $28.6 million for the three and nine month periods ended
September 30, 2000, respectively. The provision for possible credit losses for
the nine month period ended September 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 $107,000 and $368,000 for the
three and nine month periods ended September 30, 2000, compared to $146,000 and
$427,000 for the same periods in 1999, a decrease of $39,000 or 27% for the
three month period and a decrease of $59,000 or 14% for the nine month period.
The decrease during the three and nine month periods was primarily due to a loss
of $47,000 on the sale of U. S. government agency securities. These securities
were sold in order to provide funding for additional commercial lending demand
during the period.
NON-INTEREST EXPENSE
2000 Compared to 1999. Non-interest expense was $1,039,000 and $3,122,000 for
the three and nine month periods ended September 30, 2000, compared to $984,000
and $2,834,000 for the same periods in 1999, an increase of $55,000 or 6% for
the three month period and $288,000 or 10% for the nine month period. The
largest components of non-interest expense were salaries and employee benefits
which amounted to $675,000 and $1,938,000 and occupancy and equipment expense
which amounted to $114,000 and $373,000 for the three and nine month periods
ended September 30, 2000. For the same periods in 1999, salaries and employee
benefits was $574,000 and $1,647,000 and occupancy and equipment expense was
$112,000 and $329,000. The primary factor for the increase in salaries and
employee benefits was the expansion of the commercial lending and residential
lending departments. As of September 30, 2000, the number of full time
equivalent employees was 46 compared to 40 as of September 30, 1999. 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 $435,000 for the
three and nine month periods ended September 30, 2000, compared to $161,000 and
$201,000 for the same periods in 1999, an increase of $2,000 or 1% for the three
month period and an increase of $234,000 or 116% for the nine month period. The
increase was primarily a result of increased pre-tax income.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
Assets. Total assets at September 30, 2000 were $175.1 million compared to
$152.7 million at December 31, 1999, an increase of $22.4 million or 15%. The
increase was primarily due to increases in loan volume.
Federal Funds Sold. Total federal funds sold at September 30, 2000 were $770,000
compared to $5.0 million at December 31, 1999, a decrease of $4.2 million or
84%. The decrease was primarily due to the funding of new consumer, residential
real estate and commercial real estate loans.
16
17
Mortgage Loans Held for Sale. Total mortgage loans held for sale at September
30, 2000 were $2.5 million compared to $783,000 at December 31, 1999, an
increase of $1.7 million or 218%. This increase was a result of timing
differences in secondary market funding.
Investment Securities - Available for Sale. Total investment securities -
available for sale, at September 30, 2000 were $51.4 million compared to $55.0
million at December 31, 1999, a decrease of $3.6 million or 7%. The decrease in
investment securities - available for sale was due to the sale of U. S.
Government agency securities during the period. The funds from the sale of these
securities were utilized to fund additional commercial loan demand. 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):
September 30, 2000
-------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------ ----------------- ----------------- ----------------
US Treasury securities $2,246 $--- ($21) $2,225
US Government agency securities 49,809 --- (718) 49,091
Municipal bonds 125 --- (1) 124
----------------- ---------------- ---------------- ---------------
Totals $52,180 $--- ($740) $51,440
================= ================ ================ ===============
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 September 30, 2000 and December 31, 1999.
17
18
Loans. Total loans at September 30, 2000 were $113.9 million compared to $85.4
million at December 31, 1999, an increase of $28.6 million or 33% and $75.6
million at September 30, 1999, an increase of $38.3 million or 51%. Major
categories of loans included in the loan portfolio are as follows (in
thousands):
09/30/00 12/31/99 09/30/99
------------------ ------------------ ------------------
Consumer loans $17,204 $10,967 $10,566
Commercial, financial, & other 26,129 20,563 19,701
Commercial real estate construction 2,471 3,656 3,100
Commercial real estate mortgages 38,218 23,103 16,873
Residential real estate mortgages 29,921 27,101 25,384
----------------- ----------------- -----------------
113,943 85,390 75,624
Allowance for possible credit losses (1,127) (781) (750)
----------------- ----------------- -----------------
$112,816 $84,609 $74,874
================= ================= =================
The following is a summary of non-performing assets and problems loans (in
thousands):
09/30/00 12/31/99 09/30/99
------------------ ------------------ ------------------
Over 90 days past due and still accruing $202 $190 $66
Non-accrual loans 491 105 154
Renegotiated loans --- --- ---
Other real estate owned --- --- ---
----------------- ----------------- -----------------
$693 $295 $220
================= ================= =================
Non-accrual loans at September 30, 2000 were $491,000, of which, $344,000 were
well secured by residential real estate. The increase in non-accrual loans
consisted of a $286,000 slow paying residential mortgage, a $65,000 residential
mortgage in bankruptcy proceedings and a $59,000 SBA-guaranteed commercial loan.
18
19
Allowance for Possible Credit Losses. The allowance for possible credit losses
at September 30, 2000 was $1.1 million compared to $781,000 at December 31,
1999, an increase of $346,000 or 44%. 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):
Nine Months Ended Year Ended Nine Months Ended
09/30/00 12/31/99 09/30/99
------------------------ ----------------------- ------------------------
Balance, beginning of year $781 $627 $627
Charge-offs:
Consumer loans (21) (55) (55)
Commercial loans (20) (584) (543)
Recoveries:
Consumer loans 2 21 14
----------------------- ---------------------- -----------------------
Net charge-offs (39) (618) (584)
Additions charged to operations 385 772 707
----------------------- ---------------------- -----------------------
Balance, end of period $1,127 $781 $750
======================= ====================== =======================
Allowance to total loans 0.99% 0.91% 0.99%
======================= ====================== =======================
Allowance to nonperforming assets 162.63% 264.75% 340.91%
======================= ====================== =======================
Net charge-offs to average loans 0.04% 0.84% 0.81%
======================= ====================== =======================
Premises and Equipment. Bank premises and equipment at September 30, 2000 was
$2.8 million compared to $2.4 million at December 31, 1999, an increase of
$439,000 or 18%. The increase in premises and equipment was due to the purchase
of land and work in progress for the Bank's Canton Township office.
Accrued Interest Receivable. Accrued interest receivable at September 30, 2000
was $1.2 million compared to $1.4 million at December 31, 1999, a decrease of
$202,000 or 15%. The decrease was primarily due to a decrease in the Bank's
holdings of investment securities - available for sale.
Other Assets. Other assets at September 30, 2000 were $392,000 compared to
$736,000 at December 31, 1999, a decrease of $344,000 or 47%. The decrease was
primarily due to changes in deferred tax assets.
19
20
Deposits. Total deposits at September 30, 2000 were $139.5 million compared to
$118.9 million at December 31, 1999, an increase of $20.6 million or 17% and
$117.6 million at September 30, 1999, an increase of $21.9 million or 19%. The
following is a summary of the distribution of deposits (in thousands):
09/30/00 12/31/99 09/30/99
------------------ ------------------ ------------------
Non-interest bearing:
Demand $20,367 $14,859 $14,132
================= ================= =================
Interest bearing:
Checking $5,758 $5,391 $4,995
Money market 16,809 13,013 14,644
Savings 4,404 3,109 3,972
Time, under $100,000 43,176 40,984 42,809
Time, $100,000 and over 49,000 41,519 37,020
----------------- ----------------- -----------------
$119,147 $104,016 $103,440
================= ================= =================
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.
Federal Home Loan Bank Advances. Federal Home Loan Bank advances at September
30, 2000 were $6.0 million compared to $2.0 million at December 31, 1999, an
increase of $4.0 million or 200%. Federal Home Loan Bank advances were utilized
to fund increased loan demand during the period.
Mortgage Payable. Mortgage payable at September 30, 2000 was $473,000 compared
to $493,000 at December 31, 1999, a decrease of $20,000 or 4%. The decrease in
mortgage payable was a result of making standard monthly payments.
Accrued Interest Payable. Accrued interest payable at September 30, 2000 was
$646,000 compared to $469,000 at December 31, 1999, an increase of $177,000 or
38%. The increase was primarily due to the increase in the volume of time
deposits.
Other Liabilities. Other liabilities at September 30, 2000 were $529,000
compared to $601,000 at December 31, 1999, a decrease of $72,000 or 12%. The
decrease was primarily due to changes in deferred tax liabilities.
20
21
CAPITAL
Stockholders' equity at September 30, 2000 was $28.0 million compared to $27.3
million as of December 31, 1999, an increase of $707,000 or 3%. 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 September 30, 2000, the Corporation was able to repurchase 99,514 shares
within Securities and Exchange Commission guidelines primarily related to the
volume of market activity. Considering that the Corporation's stock closed at
$7.880 per share on September 30, 2000, representing a 67 percent market to book
ratio, management believes that its stock is 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 September 30, 2000
Total capital
(to risk weighted assets)
Consolidated 29,583 28.6% 8,266 8.0% 10,333 10.0%
Bank 14,762 14.5% 8,123 8.0% 10,154 10.0%
Tier 1 capital
(to risk weighted assets)
Consolidated 28,456 27.5% 4,133 4.0% 6,200 6.0%
Bank 13,635 13.4% 4,061 4.0% 6,092 6.0%
Tier 1 capital
(to average assets)
Consolidated 28,456 16.6% 6,854 4.0% 8,568 5.0%
Bank 13,635 8.7% 6,296 4.0% 7,870 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%
Based on the respective regulatory capital ratios at September 30, 2000 and
December 31, 1999, the Corporation and Bank are considered well capitalized.
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22
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 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.
22
23
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 September 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 $770 $--- $--- $--- $770
Mortgage loans held for sale 2,488 --- --- --- 2,488
Securities available for sale --- 3,968 47,472 --- 51,440
Federal Home Loan Bank stock 381 --- --- --- 381
Total loans, net of non-accrual 23,792 9,455 65,518 14,687 113,452
---------- ---------- --------- --------- ---------
Total earning assets 27,431 13,423 112,990 14,687 168,531
Interest bearing liabilities
Time deposits 24,461 43,858 23,857 --- 92,176
Other interest bearing deposits 3,030 9,089 14,852 --- 26,971
Federal Home Loan Bank advances 6,000 --- --- --- 6,000
Mortgage payable --- --- --- 473 473
---------- ---------- --------- --------- ---------
Total interest bearing liabilities 33,491 52,947 38,709 473 125,620
Net asset (liability) funding gap (6,060) (39,524) 74,281 14,214 $42,911
---------- ---------- --------- --------- =========
Cumulative net asset (liability) funding gap ($6,060) ($45,584) $28,697 $42,911
========== ========== ========= =========
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24
DEARBORN BANCORP, INC. AND SUBSIDIARY
FORM 10-Q (continued)
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS IN FORM 8-K.
(a) Financial Statements:
The following consolidated financial statements of Dearborn Bancorp, Inc.
and its subsidiary included in this report are:
Consolidated Balance Sheets - September 30, 2000 (unaudited), December 31,
1999 and September 30, 1999 (unaudited)
Consolidated Statements of Income (unaudited) - For the Three and Nine
Months Ended September 30, 2000 and 1999
Consolidated Statements of Comprehensive Income (Loss) (unaudited) - For
the Three and Nine Months Ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows (unaudited) - For the Nine Months
Ended September 30, 2000 and 1999
Notes to Consolidated Financial Statements
(b) Exhibits
Financial Data Schedule [27]
(c) A Form 8-K Report was not filed during the three months ended September 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: November 10, 2000
25
26
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule