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, 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 October 31, 2001.
Class Shares Outstanding
----- -------------------
Common Stock 2,263,185
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, 2001,
December 31, 2000 and September 30, 2000 4
Consolidated Statements of Income - For the Three
and Nine Months Ended September 30, 2001 and 2000 5
Consolidated Statements of Comprehensive Income - For
the Three and Nine Months Ended September 30, 2001 and 2000 6
Consolidated Statements of Cash Flows - For the
Nine Months Ended September 30, 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 12-25
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 26
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 27
2
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
September 30, 2001 and 2000, and the related consolidated statements of income
and comprehensive income for the three and nine month periods ended September
30, 2001 and 2000 and the related consolidated statements of cash flows for the
nine month periods ended September 30, 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
October 23, 2001
3
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
09/30/01 12/31/00 09/30/00
Unaudited Audited Unaudited
------------- ------------- -------------
ASSETS
Cash and cash equivalents
Cash and due from banks $2,525 $2,300 $2,847
Federal funds sold 2,527 6,334 770
Interest bearing deposits with banks 4,220 --- ---
------------- ------------- -------------
Total cash and cash equivalents 9,272 8,634 3,617
Mortgage loans held for sale 3,150 1,085 2,488
Securities, available for sale 33,320 51,916 51,440
Federal Home Loan Bank stock 450 450 381
Loans
Loans 153,637 128,104 113,943
Allowance for loan losses (1,571) (1,252) (1,127)
------------- ------------- -------------
Net loans 152,066 126,852 112,816
Premises and equipment, net 4,406 3,159 2,827
Accrued interest receivable 1,095 1,534 1,168
Other assets 396 248 392
------------- ------------- -------------
Total assets $204,155 $193,878 $175,129
============= ============= =============
LIABILITIES
Deposits
Non-interest bearing deposits $21,672 $19,153 $20,367
Interest bearing deposits 152,671 144,968 119,147
------------- ------------- -------------
Total deposits 174,343 164,121 139,514
Other liabilities
Federal Home Loan Bank advances --- --- 6,000
Mortgage payable 446 467 473
Accrued interest payable 836 826 646
Other liabilities 515 701 529
------------- ------------- -------------
Total liabilities 176,140 166,115 147,162
STOCKHOLDERS' EQUITY
Common stock - 5,000,000 shares authorized,
2,270,935 shares outstanding at 9/30/01,
2,381,488 shares outstanding at 12/31/00
and 2,491,475 shares outstanding at 9/30/00 27,335 27,451 28,340
Retained earnings 425 471 116
Accumulated other comprehensive income (loss) 255 (159) (489)
------------- ------------- -------------
Total stockholders' equity 28,015 27,763 27,967
Total liabilities and stockholders' equity $204,155 $193,878 $175,129
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
4
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<Caption>
(In thousands, except share and per share data) Three months ended Nine months ended
09/30/01 09/30/00 09/30/01 09/30/00
----------- ----------- ----------- -----------
Interest income
Interest on loans $3,155 $2,493 $9,055 $6,609
Interest on securities, available for sale 370 773 1,040 2,388
Interest on deposits with banks 40 --- 214 ---
Interest on federal funds 116 41 554 176
----------- ----------- ----------- -----------
Total interest income 3,681 3,307 10,863 9,173
Interest expense
Interest on deposits 1,781 1,693 5,782 4,619
Interest on other borrowings 7 43 23 123
----------- ----------- ----------- -----------
Total interest expense 1,788 1,736 5,805 4,742
Net interest income 1,893 1,571 5,058 4,431
Provision for loan losses 250 145 505 385
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 1,643 1,426 4,553 4,046
----------- ----------- ----------- -----------
Non-interest income
Service charges on deposit accounts 62 49 192 159
Fees for other services to customers 6 11 22 24
Gain on the sale of loans 222 93 663 230
Loss on the sale of securities, available for sale --- (47) (5) (47)
Other income 2 1 4 2
----------- ----------- ----------- -----------
Total non-interest income 292 107 876 368
Non-interest expenses
Salaries and employee benefits 843 675 2,442 1,938
Occupancy and equipment expense 183 114 424 373
Advertising and marketing 24 24 107 95
Stationery and supplies 49 33 142 111
Professional services 54 48 200 164
Data processing 43 42 141 123
FDIC insurance premiums 8 6 22 18
Other operating expenses 113 97 326 300
----------- ----------- ----------- -----------
Total non-interest expenses 1,317 1,039 3,804 3,122
Income before income tax provision 618 494 1,625 1,292
Income tax provision 217 163 558 435
----------- ----------- ----------- -----------
Net income $401 $331 $1,067 $857
=========== =========== =========== ===========
Share and per share data (1):
Net income - basic and diluted $0.17 $0.13 $0.45 $0.34
Weighted average number of shares outstanding - basic 2,320,509 2,500,761 2,348,147 2,520,767
Weighted average number of shares outstanding - diluted 2,391,771 2,503,372 2,392,206 2,521,474
(1) All share and per share data has been adjusted to reflect the issuance of a
stock dividend on May 15, 2001.
The accompanying notes are an integral part of these consolidated financial
statements.
5
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
Three months ended Nine months ended
09/30/01 09/30/00 09/30/01 09/30/00
----------- ----------- ---------- -----------
Net income $401 $331 $1,067 $857
Other comprehensive income, net of tax
Unrealized gains on securities
Unrealized holding gains arising during period 338 459 621 458
Plus: reclassification adjustment for losses
included in net income --- 47 5 47
Tax effects (119) (172) (212) (172)
----------- ----------- ---------- -----------
Other comprehensive income 219 334 414 333
----------- ----------- ---------- -----------
Comprehensive income $620 $665 $1,481 $1,190
=========== =========== ========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
6
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands) Nine months ended
9/30/01 9/30/00
------------- -------------
Cash flows from operating activities
Interest and fees received $11,302 $9,375
Interest paid (5,835) (4,565)
Taxes paid (1,030) (322)
Proceeds from sale of mortgages held for sale 49,054 17,712
Origination of mortgages held for sale (50,456) (19,187)
Cash paid to suppliers and employees (3,279) (2,624)
------------- -------------
Net cash provided by (used in) operating activities (244) 389
Cash flows from investing activities
Proceeds from maturities and calls of securities available for sale 37,880 4,000
Proceeds from sales of securities available for sale 13,755 3,962
Purchases of securities available for sale (32,504) (4,000)
Increase in loans, net of payments received (25,719) (28,631)
Purchases of property and equipment (1,502) (649)
------------- -------------
Net cash used in investing activities (8,090) (25,318)
Cash flows from financing activities
Net increase in non-interest bearing deposits 2,519 5,508
Net increase in interest bearing deposits 7,703 15,131
Decrease in federal funds purchased --- (3,000)
Proceeds from Federal Home Loan Bank advances --- 10,000
Repayment of Federal Home Loan Bank advances --- (6,000)
Principal payments on mortgage payable (21) (20)
Repurchase of common stock (1,229) (482)
------------- -------------
Net cash provided by financing activities 8,972 21,137
Increase (decrease) in cash and cash equivalents 638 (3,792)
Cash and cash equivalents at the beginning of the period 8,634 7,409
------------- -------------
Cash and cash equivalents at the end of the period $9,272 $3,617
------------- -------------
Reconciliation of net income to net cash provided by (used in) operating
activities
Net income $1,067 $857
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Provision for loan losses 505 385
Depreciation and amortization expense 255 248
Accretion of discount on securities, available for sale (15) (5)
Amortization of premium on securities, available for sale 100 83
Loss on sale of investment securities, available for sale 5 47
Increase in mortgages held for sale (2,065) (1,705)
Decrease in interest receivable 439 202
Increase in interest payable 10 177
(Increase) decrease in other assets (359) 172
Decrease in other liabilities (186) (72)
------------- -------------
Net cash provided by (used in) operating activities ($244) $389
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
7
DEARBORN BANCORP, INC.
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 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, 2001 and 2000, and December 31, 2000 and for the three
and nine month periods ended September 30, 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 September 30, 2001 and
2000, and for the three and nine months ended September 30, 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.
8
B. Securities Available For Sale
The amortized cost and estimated market value of securities available
for sale are as follows (in thousands):
September 30, 2001
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- ------------- --------------- ---------------
US Treasury securities $2,144 $75 $--- $2,219
US Government agency securities 190 --- --- 190
Mortgage backed securities 3,237 105 --- 3,342
Municipal bonds 125 1 --- 126
Corporate debt securities 23,238 235 --- 23,473
FHLMC preferred stock 4,000 --- (30) 3,970
--------------- ------------- --------------- ---------------
Totals $32,934 $416 ($30) $33,320
=============== ============= =============== ===============
<Caption>
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 securities available
for sale at September 30, 2001 by contractual maturity are shown below
(in thousands):
Estimated
Amortized Market
Cost Value
------------- --------------
Due in three months or less $190 $190
Due in three months through one year 12,756 12,815
Due on one year through five years 13,397 13,684
Due in greater than five years 6,591 6,631
------------- --------------
Totals $32,934 $33,320
============= ==============
Sales of securities during the nine months ended September 30, 2001
resulted in proceeds, gross gains and gross losses of $13,755,000,
$1,000 and $6,000, respectively.
9
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 525,000 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 nine months
ended September 30, 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 323,925 194,775 $ 9.08
Granted (102,925) 102,925 8.59 $3.77
------------ ----------- -----------
Outstanding at September 30, 2001 221,000 297,700 8.91
For the options outstanding at September 30, 2001, the range of
exercise prices was $6.49 to $12.14 per share with a weighted-average
remaining contractual term of 7.9 years. At September 30, 2001, 282,450
options were exercisable at weighted average exercise prices of $8.81
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
nine months ended September 30, 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 Nine Months Ended September 30,
2001 2000
-------------------------- -----------------------------
Net income
As reported $1,067 $857
Pro forma 728 669
Basic income per share
As reported $0.45 $0.34
Pro forma 0.31 0.27
Diluted income per share
As reported 0.45 0.34
Pro forma 0.30 0.27
The pro forma effects are computed with option pricing models, using
the following weighted average assumptions as of grant date for grants
during the nine month periods ended September 30, 2001 and 2000.
10
2001 2000
------------------ -------------------
Risk-free interest rate 5.12% 6.73%
Expected option life 8 years 9 years
Dividend yield 0.00% 0.00%
Expected volatility of stock price 25.65% 33.45%
All share and per share amounts have been adjusted for stock
dividends.
11
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.
12
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. On May 15, 2001, the Bank opened its fourth office, located
at 1325 N. Canton Center Road, Canton Township, Michigan. On May 1, 2001, the
Bank formed Community Bank Mortgage, Inc., a wholly-owned subsidiary of the
Bank. The Bank also expects to open a new branch in Clinton Township, Michigan
in December 2001. The Bank has received all regulatory approvals that are
necessary for the opening of this branch office. The Bank also has a pending
application for a mobile/messenger service branch, which is expected to be
formally approved in November 2001.
RESULTS OF OPERATIONS
The Corporation reported net income of $401,000 and $1,067,000 for the three and
nine month periods ended September 30, 2001, compared to net income of $331,000
and $857,000 for the three and nine month periods ended September 30, 2000. The
increase in net income was primarily due to the increase in gain on the sale of
loans and the continued improvement in net interest income. These increases were
partially offset by the increase in salaries and employee benefits. 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. The improvement in net
interest income was primarily due to the decrease in the cost of deposits and
the increase in the commercial real estate loan and residential real estate 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 increase in salaries and benefits was
primarily due to the opening of a new branch office in Canton Township,
Michigan.
13
NET INTEREST INCOME
2001 Compared to 2000. Net interest income for the three month period ended
September 30, 2001, was $1,893,000 compared to $1,571,000 for the same period
ended September 30, 2000, an increase of $322,000 or 20%. This increase was
caused primarily by the continued growth in interest earning assets and an
increase in the interest rate spread during the period. Average interest earning
assets during the three months ended September 30, 2001 were $194.6 compared to
$163.6 million during the same period in 2000, an increase of $31.0 million or
19.0%. The interest rate spread was 2.92% during the three months ended
September 30, 2001, compared to 2.43% for the three months ended September 30,
2000. The average cost of interest bearing deposits decreased from 5.61% to
4.61%, between the periods, while the average return on interest bearing assets
decreased from 8.04% to 7.53%. The Corporation's net interest margin increased
to 3.87% in 2001 from 3.82% in 2000. The Corporation's increase in net interest
margin was primarily the result of the decreasing cost on the Bank's interest
bearing liabilities. The Bank expects the interest rate spread and net interest
margin to improve throughout the remainder of 2001 as the full effect of the
repricing of time deposits during the period is realized and as funds that are
currently invested in federal funds sold and interest bearing deposits with
banks are utilized to fund loans.
Net interest income for the nine month period ended September 30, 2001 was
$5,058,000 compared to $4,431,000 for the same period ended September 30, 2000,
an increase of $627,000 or 14%. This increase was caused primarily by an
increase in average earning assets of $29.6 million between the periods while
interest bearing liabilities grew by $28.6 million. At the same time, the
Corporation's interest rate spread increased to 2.53% in 2001 from 2.47% in
2000. The Corporation's net interest margin decreased to 3.63% in 2001 from
3.77% in 2000. The increase in the Corporation's interest rate spread was
primarily the result of the decrease in the cost of the Bank's interest bearing
liabilities. The decrease in the Bank's net interest margin was primarily a
result of the Bank's average interest bearing liabilities growing at a faster
rate than its interest earning assets. The Bank's average interest earning
assets during the nine months ended September 30, 2001 were 126.5% of its
interest bearing liabilities, compared to 132.0% during the same period in 2000.
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.
14
The following tables set 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,
2001 2000
-------------------------------- ---------------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
---------- --------- --------- ---------- --------- ----------
Assets
Interest-bearing deposits with banks $3,998 $40 3.98% $--- $--- ---%
Federal funds sold 12,927 116 3.57% 2,613 41 6.24%
Securities, available for sale 29,606 370 4.97% 53,005 773 5.80%
Loans 148,033 3,155 8.48% 107,961 2,493 9.19%
---------- --------- --------- ---------- --------- ----------
Sub-total earning assets 194,564 3,681 7.53% 163,579 3,307 8.04%
Other assets 10,323 7,775
---------- ----------
Total assets $204,887 $171,354
========== ==========
Liabilities and stockholders' equity
Interest bearing deposits $153,919 $1,781 4.60% $120,602 $1,693 5.58%
Other borrowings 448 7 6.22% 2,437 43 7.02%
---------- --------- --------- ---------- --------- ----------
Sub-total interest bearing
liabilities 154,367 1,788 4.61% 123,039 1,736 5.61%
Non-interest bearing deposits 20,875 19,643
Other liabilities 1,334 1,028
Stockholders' equity 28,311 27,644
---------- ----------
Total liabilities and
stockholders' equity $204,887 $171,354
========== ==========
Net interest income $1,893 $1,571
========= =========
Net interest rate spread 2.92% 2.43%
========= ==========
Net interest margin on earning assets 3.87% 3.82%
========= ==========
15
Nine months ended September 30, Nine months ended September 30,
2001 2000
-------------------------------- --------------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
---------- --------- --------- ---------- --------- ---------
Assets
Interest-bearing deposits with banks $6,429 $214 4.46% $--- $--- ---%
Federal funds sold 16,462 554 4.51% 3,880 176 6.06%
Securities, available for sale 25,836 1,040 5.40% 54,732 2,388 5.83%
Loans 137,906 9,055 8.80% 98,396 6,609 8.97%
---------- --------- --------- ---------- --------- ---------
Sub-total earning assets 186,633 10,863 7.80% 157,008 9,173 7.80%
Other assets 10,776 7,281
---------- ----------
Total assets $197,409 $164,289
========== ==========
Liabilities and stockholders' equity
Interest bearing deposits $147,100 $5,782 5.27% $116,374 $4,619 5.30%
Other borrowings 455 23 6.78% 2,554 123 6.43%
---------- --------- --------- ---------- --------- ---------
Sub-total interest bearing
liabilities 147,555 5,805 5.27% 118,928 4,742 5.33%
Non-interest bearing deposits 20,352 16,954
Other liabilities 1,336 1,094
Stockholders' equity 28,166 27,313
---------- ----------
Total liabilities and
stockholders' equity $197,409 $164,289
========== ==========
Net interest income $5,058 $4,431
========= =========
Net interest rate spread 2.53% 2.47%
========= =========
Net interest margin on
earning assets 3.63% 3.77%
========= =========
16
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 month ended Nine months ended
September 30, 2001/2000 September 30, 2001/2000
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
Interest bearing deposits with $40 $--- $40 $214 $--- $214
banks
Federal funds sold 110 (35) $75 408 (30) 378
Securities, available for sale (183) (220) (403) (1,233) (115) (1,348)
Loans 1,044 (382) 662 2,530 (84) 2,446
------------ ----------- --------- --------- --------- ---------
Total earning assets $1,011 ($637) $374 $1,919 ($229) $1,690
============ =========== ========= ========= ========= =========
Liabilities
Interest bearing deposits $680 ($592) $88 $1,181 ($18) $1,163
Other borrowings (31) (5) (36) (104) 4 (100)
------------ ----------- --------- --------- --------- ---------
Total interest bearing liabilities $649 ($597) $52 $1,077 ($14) $1,063
============ =========== ========= ========= ========= =========
Net interest income $322 $627
========= =========
Net interest rate spread 0.49% 0.06%
========= =========
Net interest margin on
earning assets 0.05% (0.14%)
========= =========
PROVISION FOR LOAN LOSSES
2001 Compared to 2000. The provision for loan losses was $250,000 and $505,000
for the three and nine month periods ended September 30, 2001, compared to
$145,000 and $385,000 for the same periods in 2000, an increase of $105,000 or
72% for the three month period and $120,000 or 31% for the nine month period.
The provision for loan losses for the three and nine month periods ended
September 30, 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 $25.5 million for the nine month period ended September 30, 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
2001 Compared to 2000. Non-interest income was $292,000 and $876,000 for the
three and nine month periods ended September 30, 2001, compared to $107,000 and
$368,000 for the same periods in 2000, an increase of $185,000 or 173% for the
three month period and $508,000 or
17
138% for the nine month period. 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 and nine month periods ended September 30, 2001 was $15.4
million and $48.5 million compared to $8.3 million and $17.7 million during the
same periods in 2000. Management expects that non-interest income will continue
to increase as interest rates on residential mortgage loans and residential
mortgage loan activity remain at their present levels resulting in a high level
of the sale of mortgage loans.
NON-INTEREST EXPENSE
2001 Compared to 2000. Non-interest expense was $1,317,000 and $3,804,000 for
the three and nine month periods ended September 30, 2001, compared to
$1,039,000 and $3,122,000 for the same periods in 2000, an increase of $278,000
or 27% for the three month period and $682,000 or 22% for the nine month period.
The largest component of non-interest expense was salaries and employee benefits
which amounted to $843,000 and $2,442,000 for the three and nine month periods
ended September 30, 2001, compared to $675,000 and $1,938,000 for the same
periods in 2000, an increase of $168,000 or 25% for the three month period and
$504,000 or 26% for the nine month period. The primary factor for the increase
in salaries and employee benefits during the three month period was the opening
of a new office in Canton Township, Michigan. The primary factor for the
increase in salaries and employee benefits during the nine month period was the
expansion of the commercial lending, residential lending departments and the
operations department, in addition to the opening of the new branch office. As
of September 30, 2001, the number of full time equivalent employees was 56
compared to 46 as of September 30, 2000. Salaries and employee benefits will
continue to increase with general staff increases and the opening of the Clinton
Township branch office.
INCOME TAX PROVISION
2001 Compared to 2000. The income tax expense was $217,000 and $558,000 for the
three and nine month periods ended September 30, 2001, compared to $163,000 and
$435,000 for the same periods in 2000, an increase of $54,000 or 33% for the
three month period and $123,000 or 28% for the nine month period. The increase
was primarily a result of increased pre-tax income.
18
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
Assets. Total assets at September 30, 2001 were $204,155,000 compared to
$193,878,000 at December 31, 2000, an increase of $10,277,000 or 5%. The
increase was primarily due to an increase in loan volume, which was partially
offset by a decrease in investment securities, available for sale.
Federal Funds Sold. Total federal funds sold at September 30, 2001 were
$2,527,000 compared to $6,334,000 at December 31, 2000, a decrease of $3,807,000
or 60%. The decrease was primarily due to the deployment of funds into interest
bearing deposits with banks, investment securities, available for sale and
loans.
Interest bearing deposits with banks. Total interest bearing deposits with banks
at September 30, 2001 were $4,220,000 compared to $0 at December 31, 2000. These
investments were established to provide the Corporation with an alternate short
term investment option. These short term investments consisted of a
variable-rate overnight investment and a 30 day certificate of deposit with a
fixed interest rate.
Mortgage Loans Held for Sale. Total mortgage loans held for sale at September
30, 2001 were $3,150,000 compared to $1,085,000 at December 31, 2000, an
increase of $2,065,000 or 190%. 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.
Securities - Available for Sale. Total investment securities - available for
sale, at September 30, 2001 were $33,320,000 compared to $51,916,000 at December
31, 2000, a decrease of $18,596,000 or 36%. 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 through April 2001 have been deployed into
investment securities - available for sale and 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 37,883 37,883 5.50% ---
--------------- ---------------- --------------- ---------------
$51,638 $51,632 5.56% ($5)
=============== ================ =============== ===============
Please refer to Note B for the amortized cost and estimated market value of
securities - available for sale.
All securities within the Corporation's portfolio are U.S. Treasury issues, U.S.
Government sponsored agency issues, mortgage-backed securities, corporate debt
and equity 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.
19
Federal Home Loan Bank Stock. Federal Home Loan Bank stock was valued at
$450,000 at September 30, 2001 and December 31, 2000.
Loans. Total loans at September 30, 2001 were $153,637,000 compared to
$128,104,000 at December 31, 2000, an increase of $25,533,000 or 20%. Major
categories of loans included in the loan portfolio are as follows (in
thousands):
09/30/01 12/31/00 09/30/00
----------------- ---------------- -----------------
Consumer loans $18,189 $18,650 $17,204
Commercial, financial, & other 24,075 26,586 26,129
Commercial real estate construction 7,711 2,290 2,471
Commercial real estate mortgages 70,693 49,900 38,218
Residential real estate mortgages 32,969 30,678 29,921
----------------- ---------------- -----------------
153,637 128,104 113,943
Allowance for loan losses (1,571) (1,252) (1,127)
----------------- ---------------- -----------------
$152,066 $126,852 $112,816
================= ================ =================
</Table>
The following is a summary of non-performing assets and problem loans (in
thousands):
<Table>
<Caption>
09/30/01 12/31/00 09/30/00
----------------- ---------------- -----------------
Over 90 days past due and still accruing $314 $531 $202
Non-accrual loans 720 673 491
----------------- ---------------- -----------------
$1,034 $1,204 $693
================= ================ =================
Non-accrual loans at September 30, 2001 were $720,000, of which, $228,000 were
well secured by residential real estate. Non-accrual loans consisted of a
$175,000 slow paying residential mortgage, a $54,000 residential mortgage in
bankruptcy proceedings, a $37,000 slow paying consumer loan, a $100,000
partially charged off commercial loan and a $354,000 commercial loan.
Allowance for Loan Losses. The allowance for loan losses was $1,571,000 at
September 30, 2001 compared to $1,252,000 at December 31, 2000, an increase of
$319,000 or 25%. The increase in the amount provided for loan losses was offset
by net charge-offs of $186,000 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-performing loans, historical and anticipated
loss experience on such types of loans, and current and projected economic
conditions.
20
The following is an analysis of the allowance for loan losses (in thousands):
Nine Months Ended Year Ended Nine Months Ended
09/30/01 12/31/00 09/30/00
---------------------- ------------------- ----------------------
Balance, beginning of year $1,252 $781 $781
Charge-offs:
Consumer loans (43) (21) (21)
Commercial loans (180) (20) (20)
Recoveries:
Consumer loans 27 2 2
Commercial loans 10 --- ---
---------------------- ------------------- ----------------------
Net charge-offs (186) (39) (39)
Additions charged to operations 505 510 385
---------------------- ------------------- ----------------------
Balance, end of period $1,571 $1,252 $1,127
====================== =================== ======================
Allowance to total loans 1.02% 0.98% 0.99%
====================== =================== ======================
Allowance to nonperforming assets 151.19% 103.99% 162.63%
====================== =================== ======================
Net charge-offs to average loans 0.13% 0.84% 0.04%
====================== =================== ======================
Premises and Equipment. Bank premises and equipment at September 30, 2001 was
$4,406,000 compared to $3,159,000 at December 31, 2000, an increase of
$1,247,000 or 39%. The increase in premises and equipment was due to the cost of
constructing the Bank's Canton Township office, which opened for business on May
15, 2001 and work in progress for an addition to the Bank's main office, which
is scheduled for completion during the fourth quarter of 2001.
Accrued Interest Receivable. Accrued interest receivable at September 30, 2001
was $1,095,000 compared to $1,534,000 at December 31, 2000, a decrease of
$439,000 or 29%. 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, 2001 were $396,000 compared to
$248,000 at December 31, 2000, an increase of $148,000 or 60%. The increase was
primarily due to changes in deferred tax assets.
21
Deposits. Total deposits at September 30, 2001 were $174,343,000 compared to
$164,121,000 at December 31, 2000, an increase of $10,222,000 or 6%. The
following is a summary of the distribution of deposits (in thousands):
09/30/01 12/31/00 09/30/00
------------------ ----------------- -----------------
Non-interest bearing:
Demand $21,672 $19,153 $20,367
------------------ ----------------- -----------------
Interest bearing:
Checking $8,577 $6,320 $5,758
Money market 21,093 18,715 16,809
Savings 39,628 4,438 4,404
Time, under $100,000 39,203 56,572 43,176
Time, $100,000 and over 44,170 58,923 49,000
------------------ ----------------- -----------------
$152,671 $144,968 $119,147
------------------ ----------------- -----------------
Total deposits $174,343 $164,121 $139,514
================== ================= =================
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, which began in
March 2001 and targeted transaction-based deposit accounts. The increase in
money market and savings deposits reflects the efforts of management to decrease
the Bank's dependence upon time deposits as a source of funds. Management will
continue to work 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. The increase in deposits was utilized to
fund loan demand. Management expects that deposits will continue to grow due to
the recent opening of the Canton Township branch office and continued growth at
each branch.
Mortgage Payable. Mortgage payable at September 30, 2001 was $446,000 compared
to $467,000 at December 31, 2000, a decrease of $21,000 or 4%. The decrease in
mortgage payable was a result of making standard monthly payments. The mortgage
was paid off during the month of October 2001.
Accrued Interest Payable. Accrued interest payable at September 30, 2001 was
$836,000 compared to $826,000 at December 31, 2000, an increase of $10,000 or
1%.
Other Liabilities. Other liabilities at September 30, 2001 were $515,000
compared to $701,000 at December 31, 2000, a decrease of $186,000 or 27%. The
decrease was primarily due to changes in deferred tax liabilities.
22
CAPITAL
Stockholders' equity at September 30, 2001 was $28,015,000 compared to
$27,763,000 as of December 31, 2000, an increase of $252,000 or 1%.
On May 15, 2001, the Corporation announced a 5% stock dividend to the
shareholders of record on the close of business on May 31, 2001. The dividend
was paid June 15, 2001. All share and per share data contained within this
report on Form 10-Q have been adjusted to reflect the stock dividend.
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. On July 17, 2001, the Corporation announced that it would repurchase
up to an additional 125,000 shares of its outstanding common stock under a third
stock repurchase program. Through September 30, 2001, the Corporation was able
to repurchase 319,659 shares within Securities and Exchange Commission
guidelines primarily related to the volume of market activity.
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, 2001
Total capital
(to risk weighted assets)
Consolidated 29,331 16.7% 14,051 8.0% 17,564 10.0%
Bank 17,361 10.6% 13,161 8.0% 16,451 10.0%
Tier 1 capital
(to risk weighted assets)
Consolidated 27,760 15.8% 7,026 4.0% 10,539 6.0%
Bank 15,790 9.6% 6,580 4.0% 9,871 6.0%
Tier 1 capital
(to average assets)
Consolidated 27,760 13.5% 8,195 4.0% 10,244 5.0%
Bank 15,790 8.2% 7,676 4.0% 9,595 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 September 30, 2001 and
December 31, 2000, the Corporation and Bank are considered well capitalized.
23
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.
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
24
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, 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 $2,527 $--- $--- $--- $2,527
Interest bearing deposits with banks $4,220 --- --- --- 4,220
Mortgage loans held for sale 3,150 --- --- --- 3,150
Securities available for sale 8,310 7,675 12,022 5,313 33,320
Federal Home Loan Bank stock 450 --- --- --- 450
Total loans, net of non-accrual 33,603 7,778 96,046 15,490 152,917
----------- ----------- ----------- ------------ -------------
Total earning assets 52,260 15,453 108,068 20,803 196,584
Interest bearing liabilities
Time deposits 34,869 30,259 18,245 --- 83,373
Other interest bearing deposits 69,299 --- --- --- 69,299
Mortgage payable 7 20 134 285 446
----------- ----------- ----------- ------------ -------------
Total interest bearing liabilities 104,175 30,279 18,379 285 153,118
Net asset (liability) funding gap (51,915) (14,826) 89,689 20,518 $43,466
----------- ----------- ----------- ------------ =============
Cumulative net asset (liability) funding gap ($51,915) ($66,741) $22,948 $43,466
=========== =========== =========== ============
Total loans do not include non-accrual loans.
25
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, 2001 (unaudited), December
31, 2000 and September 30, 2000 (unaudited)
Consolidated Statements of Income (unaudited) - For the Three and Nine
Months Ended September 30, 2001 and 2000
Consolidated Statements of Comprehensive Income (unaudited) - For the
Three and Nine Months Ended September 30, 2001 and 2000
Consolidated Statements of Cash Flows (unaudited) - For the Nine Months
Ended September 30, 2001 and 2000
Notes to Consolidated Financial Statements
(b) A Form 8-K Report was not filed during the three months ended September
30, 2001.
26
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, 2001
27