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 March 31, 2001.
---------------
Commission file number 000-24478.
DEARBORN BANCORP, INC.
----------------------
(Exact name of registrant as specified in its charter)
Michigan 38-3073622
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
22290 Michigan Avenue, Dearborn, MI 48123-2247
----------------------------------------------
(Address of principal executive office) (Zip Code)
(313) 274-1000
--------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----------- ---------
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of April 30, 2001.
Class Shares Outstanding
----- -------------------
Common Stock 2,248,144
2
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 - March 31, 2001,
December 31, 2000 and March 31, 2000 4
Consolidated Statements of Income - For the Three
Months Ended March 31, 2001 and 2000 5
Consolidated Statements of Comprehensive Income - For
the Three Months Ended March 31, 2001 and 2000 6
Consolidated Statements of Cash Flows - For the
Three Months Ended March 31, 2001 and 2000 7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Liquidity and Capital 12-23
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
2
3
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
Dearborn Bancorp, Inc.
Dearborn, Michigan
We have reviewed the consolidated balance sheets of Dearborn Bancorp, Inc. as of
March 31, 2001 and 2000, and the related consolidated statements of income,
comprehensive income and cash flows for the three month periods ended March 31,
2001 and 2000. 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
May 4, 2001
DEARBORN BANCORP, INC. AND SUBSIDIARY
3
4
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share data) 03/31/01 12/31/00 03/31/00
(unaudited) (audited) (unaudited)
---------------- --------------- ---------------
ASSETS
Cash and cash equivalents
Cash and due from banks $3,767 $2,300 $2,929
Federal funds sold 24,124 6,334 654
Interest bearing deposits with banks 16,269 --- ---
---------------- --------------- ---------------
Total cash and cash equivalents 44,160 8,634 3,583
Mortgage loans held for sale 6,855 1,085 540
Investment securities, available for sale 12,891 51,916 54,739
Federal Home Loan Bank stock 450 450 381
Loans
Loans 132,169 128,104 93,959
Allowance for loan losses (1,272) (1,252) (880)
---------------- --------------- ---------------
Net loans 130,897 126,852 93,079
Premises and equipment, net 3,721 3,159 2,711
Accrued interest receivable 902 1,534 1,176
Other assets 192 248 837
---------------- --------------- ---------------
Total assets $200,068 $193,878 $157,046
================ =============== ===============
LIABILITIES
Deposits
Non-interest bearing deposits $22,290 $19,153 $14,380
Interest bearing deposits 147,739 144,968 108,837
---------------- --------------- ---------------
Total deposits 170,029 164,121 123,217
Other liabilities
Federal funds purchased --- --- 1,100
Federal Home Loan Bank advances --- --- 4,000
Mortgage payable 460 467 486
Accrued interest payable 866 826 543
Other liabilities 581 701 648
---------------- --------------- ---------------
Total liabilities 171,936 166,115 129,994
STOCKHOLDERS' EQUITY
Common stock - 5,000,000 shares authorized,
2,252,744 shares outstanding at March 31, 2001,
2,268,244 shares outstanding at December 31,
2000 and 2,404,910 shares outstanding at
March 31, 2000 27,310 27,451 28,576
Retained earnings (deficit) 791 471 (529)
Accumulated other comprehensive income (loss) 31 (159) (995)
---------------- --------------- ---------------
Total stockholders' equity 28,132 27,763 27,052
Total liabilities and stockholders' equity $200,068 $193,878 $157,046
================ =============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
DEARBORN BANCORP, INC. AND SUBSIDIARY
4
5
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share data) Three Months Ended
03/31/01 03/31/00
-------------------- ------------------
Interest income
Interest on loans $2,936 $1,909
Interest on investment securities, available for sale 455 794
Interest on interest bearing deposits with banks 59 ---
Interest on federal funds and deposits with banks 220 22
-------------------- ------------------
Total interest income 3,670 2,725
Interest expense
Interest on deposits 2,055 1,321
Interest on other borrowings 8 60
-------------------- ------------------
Total interest expense 2,063 1,381
Net interest income 1,607 1,344
Provision for loan losses 130 115
-------------------- ------------------
Net interest income after provision for loan losses 1,477 1,229
-------------------- ------------------
Non-interest income
Service charges on deposit accounts 62 58
Fees for other services to customers 7 6
Gain on the sale of loans 160 61
Gain(loss) on the sale of investment securities (5) ---
Other income 2 (1)
-------------------- ------------------
Total non-interest income 226 124
Non-interest expenses
Salaries and employee benefits 806 591
Occupancy and equipment expense 113 147
Advertising and marketing 36 31
Stationery and supplies 41 42
Professional services 73 65
Data processing 48 35
FDIC insurance premiums 7 6
Other operating expenses 93 116
-------------------- ------------------
Total non-interest expenses 1,217 1,033
Income before income tax provision 486 320
Income tax provision 166 109
-------------------- ------------------
Net income $320 $211
==================== ==================
Per share data:
Net income - basic and diluted $0.14 $0.09
Weighted average number of shares outstanding - basic 2,261,251 2,423,365
Weighted average number of shares outstanding - diluted 2,273,900 2,423,365
The accompanying notes are an integral part of these consolidated financial
statements
DEARBORN BANCORP, INC. AND SUBSIDIARY
5
6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousand) Three Months Ended
03/31/01 03/31/00
-------------------- -------------------
Net income $320 $211
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during period 283 (260)
Less: reclassification adjustment for losses included
in net income 5 ---
Tax effects (98) 87
-------------------- -------------------
Other comprehensive income (loss) 190 (173)
-------------------- -------------------
Comprehensive income $510 $38
==================== ===================
The accompanying notes are an integral part of these consolidated financial
statements
DEARBORN BANCORP, INC. AND SUBSIDIARY
6
7
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands) Three Months Ended
3/31/01 3/31/00
--------------- ---------------
Cash flows from operating activities
Interest and fees received $4,302 $2,919
Interest paid (2,023) (1,307)
Taxes paid (450) (87)
Proceeds from sale of mortgages held for sale 14,451 4,256
Origination of mortgages held for sale (20,221) (3,952)
Cash paid to suppliers and employees (781) (862)
-------- --------
Net cash provided by (used in) operating activities (4,722) 967
Cash flows from investing activities
Proceeds from calls and maturities of securities available for sale 31,750 ---
Proceeds from sales of securities available for sale 13,755 ---
Purchases of securities available for sale (6,212) (5)
Increase in loans, net of payments received (4,175) (8,585)
Purchases of property and equipment (630) (392)
-------- --------
Net cash provided by (used in) investing activities 34,488 (8,982)
Cash flows from financing activities
Net increase (decrease) in non-interest bearing deposits 3,137 (479)
Net increase in interest bearing deposits 2,771 4,821
Decrease in federal funds purchased --- (1,900)
Increase in Federal Home Loan Bank advances --- 2,000
Principal payments on mortgage payable (7) (7)
Purchase of treasury stock (141) (246)
-------- --------
Net cash provided by financing activities 5,760 4,189
Increase (decrease) in cash and cash equivalents 35,526 (3,826)
Cash and cash equivalents at the beginning of the period 8,634 7,409
-------- --------
Cash and cash equivalents at the end of the period $44,160 $3,583
======== ========
Reconciliation of net income to net cash provided by
(used in) operating activities
Net income $320 $211
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Provision for loan losses 130 115
Depreciation and amortization expense 68 69
Accretion of discount on investment securities (10) (1)
Amortization of premium on investment securities 31 29
Loss on the sale of investment securities 5 --
Gain on sale of mortgage loans (160) (61)
(Increase) decrease in mortgages held for sale (5,610) 304
Decrease in interest receivable 632 194
Increase in interest payable 40 74
(Increase) in other assets (48) (13)
Increase (decrease) in other liabilities (120) 46
-------- --------
Net cash provided by (used in) operating activities ($4,722) $967
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
DEARBORN BANCORP, INC.
7
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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 March
31, 2001 and 2000, and December 31, 2000 and for the three month period
ended March 31, 2001 and 2000 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 March 30, 2001 and 2000,
and for the three months ended March 31, 2001 and 2000 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 2000 Annual Report to Stockholders on
Form 10-K.
B. Investment Securities - Available For Sale
8
9
The amortized cost and estimated market value of investment securities
available for sale are as follows (in thousands):
March 31, 2001
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- --------------- ---------------- ---------------
US Treasury securities $2,196 $31 $--- $2,227
US Government agency securities 4,310 --- (1) 4,309
Corporate debt securities 2,018 4 --- 2,022
Municipal bonds 125 --- --- 125
FHLMC preferred stock 4,000 10 --- 4,010
Money market mutual funds 198 --- --- 198
-------------- --------------- ---------------- ---------------
Totals $12,847 $45 ($1) $12,891
============== =============== ================ ===============
December 31, 2000
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- --------------- ---------------- ---------------
US Treasury securities $2,221 $--- ($6) $2,215
US Government agency securities 49,810 --- (233) 49,577
Municipal bonds 125 --- (1) 124
-------------- --------------- ---------------- ---------------
Totals $52,156 $--- ($240) $51,916
============== =============== ================ ===============
The amortized cost and estimated market value of investment securities
- available for sale at March 31, 2001 by contractual maturity are
shown below (in thousands):
Estimated
Amortized Market
Cost Value
--------------- ---------------
Due in three months or less $198 $198
Due in three months through one year 190 190
Due in one year through five years 8,459 8,493
Due in greater than five years 4,000 4,010
--------------- ---------------
Totals $12,847 $12,891
=============== ===============
Sales of securities during the three months ended March 31, 2001
resulted in proceeds, gross gains and gross losses of $13,755,000,
$1,000 and $6,000, respectively.
C. Stock Option Plan
9
10
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 for the three months
ended March 31, 2001 is as follows:
Weighted
Weighted Average Fair
Available Average Value of
for Options Exercise Options
Grant Outstanding Price Granted
----- ----------- ----- -------
Outstanding at January 1, 2001 308,498 185,502 $ 9.53
Granted (88,500) 88,500 8.64 3.79
------------- -------------
Outstanding at March 31, 2001 219,998 274,002 9.24
For the options outstanding at March 31, 2001, 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 March 31, 2001, 185,502 options were
exercisable at weighted average exercise prices of $9.53 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
three months ended March 31, 2001 and 2000 (in thousands, except per
share data). The pro forma effects may increase in the future if more
options are granted.
For the Three Months Ended March 31,
2001 2000
-------------------------- -----------------------------
Net income
As reported $320 $211
Pro forma 184 136
Basic income per share
As reported $0.14 $0.09
Pro forma 0.08 0.06
Diluted income per share
As reported 0.14 0.09
Pro forma 0.08 0.06
The pro forma effects are computed with option pricing models, using
the following weighted average assumptions as of grant date for grants
during the three month periods ended March 31, 2001 and 2000.
2001 2000
------------------ -------------------
Risk-free interest rate 5.15% 6.76%
Expected option life 8 years 9 years
Dividend yield 0.00% 0.00%
Expected volatility of stock price 25.50% 33.45%
All share and per share amounts have been adjusted for stock
dividends.
10
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PART I - FINANCIAL INFORMATION
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
11
12
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.
12
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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 second quarter of 2001. The Bank is also in the process
of forming a mortgage company, which will be operational on May 1, 2001.
RESULTS OF OPERATIONS
The Corporation reported net income of $320,000 for the three month period ended
March 31, 2001, compared to net income of $211,000 for the three month period
ended March 31, 2000. The increase in net income was primarily due to the
improvements in net interest income and the increase in gain on the sale of
loans. The improvement in net interest income was primarily due to the increase
in the commercial real estate loan and other commercial loan portfolios during
the period, somewhat offset by the compression of the net interest margin
discussed more fully below. Management expects net interest income to continue
to increase during 2001 due to the continued growth in the loan portfolio and
the continued diversification of the deposit mix to emphasize transaction based
deposit products. The gain on sale of loans, which is based on the level of
residential real estate mortgage originations is also expected to continue at
this level during the next three months based on the current interest rate
environment. These improvements in net income will be partially offset by the
start-up costs of a new branch office in Canton Township, Michigan.
NET INTEREST INCOME
2001 Compared to 2000. As noted on the two charts on the following pages, net
interest income for the three month period ended March 31, 2001, was $1,607,000
compared to $1,344,000 for the same period ended March 31, 2000, an increase of
$263,000 or 20%. This increase was caused primarily by an increase in average
earning assets of $36.7 million between the periods while interest-bearing
liabilities grew by $33.6 million. At the same time the Corporation's interest
rate spread decreased to 2.28% in 2001 from 2.41% in 2000. The Corporation's net
interest margin decreased to 3.55% in 2001 from 3.68% in 2000. The Corporation's
decrease in interest rate spread and net interest margin was primarily the
result of the increasing cost of the Bank's deposits as a result of a rise in
general industry rates during the previous quarter, which was partially offset
by the increasing yield on the Bank's loan portfolio. The Bank expects the
interest rate spread and net interest margin to improve throughout the remainder
of 2001 as time deposits are repriced in a lower interest rate environment more
rapidly than loans reprice.
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14
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 March 31, Three months ended March 31,
2001 2000
------------------------------- -------------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
---------- -------- --------- ---------- -------- ---------
Assets
Federal funds sold and interest
bearing deposits with banks $21,202 $279 5.34% $1,582 $22 5.59%
Investment securities, available for sale 32,424 455 5.69% 55,259 794 5.78%
Loans 130,088 2,936 9.15% 90,159 1,909 8.52%
---------- -------- --------- ---------- -------- ---------
Sub-total earning assets 183,714 3,670 8.10% 147,000 2,725 7.46%
Other assets 9,302 6,043
---------- ----------
Total assets $193,016 $153,043
========== ==========
Liabilities and stockholders' equity
Interest bearing deposits $143,217 $2,055 5.82% $106,123 $1,321 5.01%
Other borrowings 462 8 7.02% 3,943 60 6.12%
---------- -------- --------- ---------- -------- ---------
Sub-total interest bearing liabilities 143,679 2,063 5.82% 110,066 1,381 5.05%
Non-interest bearing deposits 19,878 14,667
Other liabilities 1,466 1,128
Stockholders' equity 27,993 27,182
---------- ----------
Total liabilities and stockholders'
equity $193,016 $153,043
========== ==========
Net interest income $1,607 $1,344
======== ========
Net interest rate spread 2.28% 2.41%
========= =========
Net interest margin on earning assets 3.55% 3.68%
========= =========
14
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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 March 31,
2001/2000
Change in Interest Due to:
-------------------------------------------------------
Average Average Net
(In thousands) Balance Rate Change
---------------- ---------------- ----------------
Assets
Federal funds sold and interest
bearing deposits with banks $258 ($1) $257
Investment securities, available for sale (327) (12) (339)
Loans 886 141 1,027
---------------- ---------------- ----------------
Total earning assets $817 $128 $945
================ ================ ================
Liabilities
Interest bearing deposits $522 $212 $734
Other borrowings (61) 9 (52)
---------------- ---------------- ----------------
Total interest bearing liabilities $461 $221 $682
================ ================ ================
Net interest income $263
================
Net interest rate spread (0.13%)
================
Net interest margin on earning assets (0.13%)
================
PROVISION FOR LOAN LOSSES
2001 Compared to 2000. The provision for loan losses was $130,000 for the three
month period ended March 31, 2001, compared to $115,000 for the same period in
2000, an increase of $15,000 or 13% for the three month period. The provision
for loan losses for the three month period ended March 31, 2001 is based on the
internal analysis of the adequacy of the allowance for loan losses and the
increase is primarily the result of loan growth of $4.1 million for the three
month period ended March 31, 2001. The provision for loan 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.
NON-INTEREST INCOME
15
16
2001 Compared to 2000. Non-interest income was $226,000 for the three month
period ended March 31, 2001, compared to $124,000 for the same period in 2000,
an increase of $102,000 or 82%. The increase was primarily due to the increase
in the gain on the sale of loans during the period. The amount of loans sold
during the three months ended March 31, 2001 was $14.5 million compared to $4.3
million during the same period in 2000. Management expects that non-interest
income will continue to increase as interest rates decline on residential
mortgage loans.
NON-INTEREST EXPENSE
2001 Compared to 2000. Non-interest expense was $1,217,000 for the three month
period ended March 31, 2001, compared to $1,033,000 for the same period in 2000,
an increase of $184,000 or 18%. The largest component of non-interest expense
was salaries and employee benefits which amounted to $806,000 for the three
month period ended March 31, 2001, compared to $591,000 for the same period in
2000, an increase of $215,000 or 36%. The primary factor for the increase in
salaries and employee benefits was the expansion of the commercial lending,
residential lending departments and the operations department. As of March 31,
2001, the number of full time equivalent employees was 50 compared to 40 as of
March 31, 2000. Salaries and employee benefits will continue to increase with
general staff increases and the opening of the Canton Township branch office.
As of March 31, 2000, the Corporation recorded $32,000 in Michigan Single
Business Tax expense. During 2001, the Corporation estimates that Michigan
Single Business Tax expense to be approximately $100,000. However, in order to
take advantage of a tax planning strategy, the Bank is in the process of forming
a 100% Bank-owned Mortgage Company that is expected to begin operating by May 1,
2001. The formation of Community Bank Mortgage, Inc. will help management to
streamline the operations of its mortgage banking activities and result in
estimated savings during 2001 of approximately $50,000 in expenses after the
initial cost of formation. In the years thereafter, the Corporation expects to
nearly eliminate all Michigan Single Business Tax expense.
INCOME TAX PROVISION
2001 Compared to 2000. The income tax expense was $166,000 for the three month
period ended March 31, 2001, compared to $109,000 for the same period in 2000,
an increase of $57,000 or 52%. The increase was primarily a result of increased
pre-tax income.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2001 AND DECEMBER 31, 2000
16
17
Assets. Total assets at March 31, 2001 were $200.1 million compared to $193.9
million at December 31, 2000, an increase of $6.2 million or 3%. The increase
was primarily due to increases in loan volume.
Federal Funds Sold. Total federal funds sold at March 31, 2001 were $24.1
million compared to $6.3 million at December 31, 2000, an increase of $17.8
million or 283%. The increase was primarily due to the short term deployment of
funds that were received as a result of several calls of government agency
securities by the issuer of the security. These funds are deployed into federal
funds sold until they can be invested into other securities or can be utilized
to fund loan volume.
Interest bearing deposits with banks. Total interest bearing deposits with banks
at March 31, 2001 were $16.3 million compared to $0.0 million at December 31,
2000. This investment was established to provide the Corporation with an
alternate short term investment option. This short term investment is a
variable-rate certificate of deposit with the Federal Home Loan Bank of
Indianapolis that carries a similar rate of return to federal funds sold.
Mortgage Loans Held for Sale. Total mortgage loans held for sale at March 31,
2001 were $6.9 million compared to $1.1 million at December 31, 2000, an
increase of $5.8 million or 532%. This increase was a result of a significant
increase in the level of residential real estate mortgage loan activity due to
decreasing mortgage interest rates during the period.
Investment Securities - Available for Sale. Total investment securities -
available for sale, at March 31, 2001 were $12.9 million compared to $51.9
million at December 31, 2000, a decrease of $39.0 million or 75%. The decrease
in investment securities - available for sale was due to calls by the issuer and
the sale of U. S. Government agency securities during the period. The funds from
the sale of U. S. Government agency securities, which occurred in January 2001
were utilized to fund loan demand. The funds from the calls of Government agency
securities, which occurred in February 2001 and March 2001 were invested in
federal funds sold until they can be deployed into loans. The following is a
summary of securities that were sold or called by the issuer during the period.
Par Amortized Average
Value Cost Yield Gain (Loss)
--------------- ---------------- --------------- ---------------
Securities sold $13,755 $13,749 5.75% (5)
Securities called by issuer 31,750 31,748 5.58% ---
--------------- ---------------- --------------- ---------------
$45,505 $45,497 5.63% (5)
=============== ================ =============== ===============
Please refer to Note B for the amortized cost and estimated market value of
investment securities - available for sale.
All securities within the Corporation's portfolio are U.S. Treasury issues, U.S.
Government sponsored agency issues, corporate debt and equity securities
carrying ratings of Aa2 or better or
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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.
Federal Home Loan Bank Stock. Federal Home Loan Bank stock was valued at
$450,000 at March 31, 2001 and December 31, 2000.
Loans. Total loans at March 31, 2001 were $132.2 million compared to $128.1
million at December 31, 2000, an increase of $4.1 million or 3%. Major
categories of loans included in the loan portfolio are as follows (in
thousands):
03/31/01 12/31/00 03/31/00
------------------- ------------------- -------------------
Consumer loans $17,840 $18,650 $12,909
Commercial, financial, & other 28,546 26,586 20,828
Commercial real estate construction 3,274 2,290 2,439
Commercial real estate mortgages 54,573 49,900 29,989
Residential real estate mortgages 27,936 30,678 27,794
------------------- ------------------- -------------------
132,169 128,104 93,959
Allowance for loan losses (1,272) (1,252) (880)
------------------- ------------------- -------------------
$130,897 $126,852 $93,079
=================== =================== ===================
The following is a summary of non-performing assets and problems loans (in
thousands):
03/31/01 12/31/00 03/31/00
------------------- ------------------- -------------------
Over 90 days past due and still accruing $413 $531 $---
Non-accrual loans 291 673 963
Renegotiated loans 362 --- ---
Other real estate owned --- --- ---
------------------- ------------------- -------------------
$1,066 $1,204 $963
=================== =================== ===================
Non-accrual loans at March 31, 2001 were $291,000, of which, $232,000 were well
secured by residential real estate. Non-accrual loans consisted of a $174,000
slow paying residential mortgage, a $58,000 residential mortgage in bankruptcy
proceedings and a $59,000 SBA-guaranteed commercial loan. Renegotiated loans
consists of one loan that is paid current.
Allowance for Loan Losses. The allowance for loan losses was $1.3 million at
March 31, 2001 and December 31, 2000. The increase in the amount provided for
loan losses was offset by net charge-offs of $110,000 during the period. The
allowance for loan losses was based upon management's assessment of relevant
factors, including loan growth, types and amounts of non-
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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 loan losses (in thousands):
Quarter Ended Year Ended Quarter Ended
03/31/01 12/31/00 03/31/00
------------------- ------------------- -------------------
Balance, beginning of year $1,252 $781 $781
Charge-offs:
Consumer loans (34) (21) (16)
Commercial loans (88) (20) ---
Recoveries:
Consumer loans 8 --- ---
Commercial loans 4 2 ---
------------------- ------------------- -------------------
Net charge-offs (110) (39) (16)
Additions charged to operations 130 510 115
------------------- ------------------- -------------------
Balance, end of period $1,272 $1,252 $880
=================== =================== ===================
Allowance to total loans 0.96% 0.98% 0.94%
=================== =================== ===================
Allowance to nonperforming assets 119.32% 103.99% 91.38%
=================== =================== ===================
Net charge-offs to average loans 0.08% 0.04% 0.02%
=================== =================== ===================
Premises and Equipment. Bank premises and equipment at March 31, 2001 was $3.7
million compared to $3.2 million at December 31, 2000, an increase of $562,000
or 18%. The increase in premises and equipment was due to work in progress for
the Bank's Canton Township office, which will open in May 2001.
Accrued Interest Receivable. Accrued interest receivable at March 31, 2001 was
$902,000 compared to $1.5 million at December 31, 2000, a decrease of $632,000
or 41%. The decrease was primarily due to a decrease in the Bank's holdings of
investment securities - available for sale.
Other Assets. Other assets at March 31, 2001 were $192,000 compared to $248,000
at December 31, 2000, a decrease of $56,000 or 23%. The decrease was primarily
due to changes in deferred tax assets.
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Deposits. Total deposits at March 31, 2001 were $170.0 million compared to
$164.1 million at December 31, 2000, an increase of $5.9 million or 4%. The
following is a summary of the distribution of deposits (in thousands):
03/31/01 12/31/00 03/31/00
------------------- ------------------- -------------------
Non-interest bearing:
Demand $22,290 $19,153 $14,380
------------------- ------------------- -------------------
Interest bearing:
Checking $7,533 $6,320 $5,302
Money market 21,087 18,715 15,007
Savings 6,433 4,438 3,827
Time, under $100,000 56,485 56,572 40,935
Time, $100,000 and over 56,201 58,923 43,766
------------------- ------------------- -------------------
$147,739 $144,968 $108,837
=================== =================== ===================
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 2001, which
targeted transaction-based deposit accounts. The increase in deposits was
utilized to fund loan demand. Management expects that deposits will continue to
grow due to the opening of the Canton Township branch office and continued
growth at each branch. Management is working hard to change the mix of the
portfolio by focusing more heavily on demand, interest bearing checking, savings
and money market, while reducing its reliance on time deposits.
Mortgage Payable. Mortgage payable at March 31, 2001 was $460,000 compared to
$467,000 at December 31, 2000, a decrease of $7,000 or 1%. The decrease in
mortgage payable was a result of making standard monthly payments.
Accrued Interest Payable. Accrued interest payable at March 31, 2001 was
$866,000 compared to $826,000 at December 31, 2000, an increase of $40,000 or
5%. The increase was primarily due to the increase in the volume of interest
bearing deposits.
Other Liabilities. Other liabilities at March 31, 2001 were $581,000 compared to
$701,000 at December 31, 2000, a decrease of $120,000 or 17%. The decrease was
primarily due to changes in deferred tax liabilities.
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CAPITAL
Stockholders' equity at March 31, 2001 was $28.1 million compared to $27.8
million as of December 31, 2000, an increase of $369,000 or 1%. In prior years,
the Corporation had announced that it would repurchase up to 250,000 shares of
its outstanding common stock under two stock repurchase programs. Through March
31, 2001, the Corporation was able to repurchase 226,551 shares within
Securities and Exchange Commission guidelines primarily related to the volume of
market activity. Considering that the Corporation's stock closed at $9.000 per
share on March 31, 2001, representing a 72 percent market to book ratio, the
Corporation will continue to repurchase shares during 2001.
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 March 31, 2001,
Total capital
(to risk weighted assets)
Consolidated 29,373 21.6% 10,872 8.0% 13,590 10.0%
Bank 16,448 12.7% 10,378 8.0% 12,973 10.0%
Tier 1 capital
(to risk weighted assets)
Consolidated 28,101 20.7% 5,436 4.0% 8,154 6.0%
Bank 15,176 11.7% 5,189 4.0% 7,784 6.0%
Tier 1 capital
(to average assets)
Consolidated 28,101 14.6% 7,722 4.0% 9,653 5.0%
Bank 15,176 8.5% 7,179 4.0% 8,974 5.0%
As of December 31, 2000
Total capital
(to risk weighted assets)
Consolidated 29,174 22.5% 10,353 8.0% 12,941 10.0%
Bank 16,159 12.9% 10,023 8.0% 12,529 10.0%
Tier 1 capital
(to risk weighted assets)
Consolidated 27,922 21.7% 5,176 4.0% 7,765 6.0%
Bank 14,907 11.9% 5,012 4.0% 7,518 6.0%
Tier 1 capital
(to average assets)
Consolidated 27,922 15.3% 7,351 4.0% 9,188 5.0%
Bank 14,907 8.7% 6,817 4.0% 8,522 5.0%
Based on the respective regulatory capital ratios at March 31, 2001 and December
31, 2000, the Corporation and Bank are considered well capitalized.
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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.
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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 March 31, 2001, which are expected
to mature or reprice in each of the time periods shown below.
Interest Rate Sensitivity Period
-----------------------------------------------------------------
(In thousands) 1-90 91-365 1-5 Over
Days Days Years 5 Years Total
------------ ------------ ------------ ----------- ------------
Earning assets
Federal funds sold $24,124 $--- $--- $--- $24,124
Interest bearing deposits with banks 16,269 --- --- --- 16,269
Mortgage loans held for sale 6,855 --- --- --- 6,855
Securities available for sale 199 --- 12,692 --- 12,891
Federal Home Loan Bank stock 450 --- --- --- 450
Total loans (1) 33,343 7,589 78,149 12,797 131,878
------------ ------------ ------------ ----------- ------------
Total earning assets 81,240 7,589 90,841 12,797 192,467
Interest bearing liabilities
Time deposits 61,305 42,127 9,254 --- 112,686
Other interest bearing deposits 35,053 --- --- --- 35,053
Mortgage payable 7 22 129 302 460
------------ ------------ ------------ ----------- ------------
Total interest bearing liabilities 96,365 42,149 9,383 302 148,199
Net asset (liability) funding gap (15,125) (34,560) 81,458 12,495 $44,268
------------ ------------ ------------ ----------- ============
Cumulative net asset (liability) funding gap ($15,125) ($49,685) $31,773 $44,268
============ ============ ============ ===========
(1) Total loans do not include non-accrual loans.
DEARBORN BANCORP, INC. AND SUBSIDIARY
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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 - March 31, 2001 (unaudited), December 31,
2000 and March 31, 2000 (unaudited)
Consolidated Statements of Income (unaudited) - For the Three Months
Ended March 31, 2001 and 2000
Consolidated Statements of Comprehensive Income (unaudited) - For the
Three Months Ended March 31, 2001 and 2000
Consolidated Statements of Cash Flows (unaudited) - For the Three
Months Ended March 31, 2001 and 2000
Notes to Consolidated Financial Statements
(b) A Form 8-K Report was not filed during the three months ended March 31,
2001.
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DEARBORN BANCORP, INC.
FORM 10-Q (continued)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dearborn Bancorp, Inc.
(Registrant)
/s/ John E. Demmer
-------------------------------
John E. Demmer
Chairman and Chief Executive Officer
/s/ Michael J. Ross
-------------------------------
Michael J. Ross
President
/s/ Jeffrey L. Karafa
-------------------------------
Jeffrey L. Karafa
Treasurer and Chief Financial Officer
Date: May 10, 2001
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