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, 2002. ------------------- 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 offices) (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 by check mark whether the registrant is an accelerated filer (as defined by rule 12b-2 of the Exchange Act). Yes No X ------------ ------------ Indicate the number of shares outstanding for each of the issuer's classes of common stock, as of October 31, 2002. Class Shares Outstanding ----- ------------------- Common Stock 2,488,945 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, 2002, December 31, 2001 and September 30, 2001 4 Consolidated Statements of Income - For the Three and Nine Months Ended September 30, 2002 and 2001 5 Consolidated Statements of Comprehensive Income - For the Three and Nine Months Ended September 30, 2002 and 2001 6 Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2002 and 2001 7 Notes to Consolidated Financial Statements 8-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-24 Item 3. Quantitative and Qualitative Disclosures about Market Risk 25-26 Item 4. Controls and Procedures 27 Part II. Other Information: Pursuant to SEC rules and regulations, the following item is included with the Form 10-Q Report: Item 6. Exhibits and Reports on Form 8-K 28 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 29 CERTIFICATIONS 30-35 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, 2002 and 2001, and the related consolidated statements of income and comprehensive income for the three and nine month periods ended September 30, 2002 and 2001, and the related statements of cash flows for the nine month periods ended September 30, 2002 and 2001. 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 14, 2002 3 DEARBORN BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars, in thousands) 09/30/02 12/31/01 09/30/01 ------------------ ------------------ ------------------ ASSETS Cash and cash equivalents Cash and due from banks $4,176 $3,600 $2,525 Federal funds sold 9,670 4,887 2,527 Interest bearing deposits with banks 6,751 7,387 4,220 ------------------ ------------------ ------------------ Total cash and cash equivalents 20,597 15,874 9,272 Mortgage loans held for sale 380 2,915 3,150 Securities available for sale 19,624 21,652 33,320 Federal Home Loan Bank stock 1,033 1,000 450 Loans Loans 251,174 180,892 153,637 Allowance for loan losses (2,700) (1,922) (1,571) ------------------ ------------------ ------------------ Net loans 248,474 178,970 152,066 Premises and equipment, net 5,033 4,746 4,406 Accrued interest receivable 1,197 1,085 1,095 Other assets 600 623 396 ------------------ ------------------ ------------------ Total assets $296,938 $226,865 $204,155 ================== ================== ================== LIABILITIES Deposits Non-interest bearing deposits $36,038 $21,441 $21,672 Interest bearing deposits 209,534 156,040 152,671 ------------------ ------------------ ------------------ Total deposits 245,572 177,481 174,343 Other liabilities Federal Home Loan Bank advances 20,660 20,000 --- Mortgage payable --- --- 446 Accrued interest payable 609 804 836 Other liabilities 302 677 515 ------------------ ------------------ ------------------ Total liabilities 267,143 198,962 176,140 STOCKHOLDERS' EQUITY Common stock - 5,000,000 shares authorized, 2,481,609 shares at 09/30/02, 2,471,609 at 12/31/01; and 2,501,481 shares at 09/30/01 28,667 27,675 27,335 Retained earnings 1,078 168 425 Accumulated other comprehensive income 50 60 255 ------------------ ------------------ ------------------ Total stockholders' equity 29,795 27,903 28,015 Total liabilities and stockholders' equity $296,938 $226,865 $204,155 ================== ================== ================== The accompanying notes are an integral part of these consolidated financial statements. 4 DEARBORN BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except share and per share data) Three Months Ended Nine Months Ended 09/30/02 09/30/01 09/30/02 09/30/01 ----------- ------------- ----------- ----------- Interest income Interest on loans, including fees $4,443 $3,155 $12,123 $9,055 Interest on securities available for sale 296 370 870 1,040 Interest on interest bearing deposits with banks 25 40 83 214 Interest on federal funds 37 116 167 554 ----------- ------------- ----------- ----------- Total interest income 4,801 3,681 13,243 10,863 Interest expense Interest on deposits 1,655 1,781 4,859 5,782 Interest on other borrowings 230 7 679 23 ----------- ------------- ----------- ----------- Total interest expense 1,885 1,788 5,538 5,805 Net interest income 2,916 1,893 7,705 5,058 Provision for loan losses 400 250 888 505 ----------- ------------- ----------- ----------- Net interest income after provision for loan losses 2,516 1,643 6,817 4,553 ----------- ------------- ----------- ----------- Non-interest income Service charges on deposit accounts 97 62 261 192 Fees for other services to customers 7 6 23 22 Gain on the sale of loans 321 222 676 663 Gain (loss) on the sale of securities available for sale 138 -- 138 (5) Other income 16 2 32 4 ----------- ------------- ----------- ----------- Total non-interest income 579 292 1,130 876 Non-interest expenses Salaries and employee benefits 1,156 843 3,260 2,442 Occupancy and equipment expense 240 183 683 424 Advertising and marketing 28 24 147 107 Stationery and supplies 43 49 156 142 Professional services 59 54 181 200 Data processing 62 43 184 141 FDIC insurance premiums 10 8 25 22 Other operating expenses 182 113 478 326 ----------- ------------- ----------- ----------- Total non-interest expenses 1,780 1,317 5,114 3,804 ----------- ------------- ----------- ----------- Income before income tax provision 1,315 618 2,833 1,625 Income tax provision 447 217 962 558 ----------- ------------- ----------- ----------- Net income $868 $401 $1,871 $1,067 =========== ============= =========== =========== Share and per share data: Net income - basic $0.35 $0.16 $0.76 $0.41 Net income - diluted $0.33 $0.15 $0.72 $0.40 Weighted average number of shares outstanding - basic 2,472,393 2,556,088 2,471,870 2,586,532 Weighted average number of shares outstanding - diluted 2,613,226 2,634,625 2,591,538 2,635,064 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 09/30/02 09/30/01 09/30/02 09/30/01 ----------- ----------- ----------- ----------- Net income $868 $401 $1,871 $1,067 Other comprehensive income (loss), net of tax Unrealized gains (losses) on securities Unrealized holding gains (losses) arising during period (6) 338 123 621 Less: reclassification adjustment for (gains) losses Included net income (138) -- (138) 5 Tax effects 49 (119) 5 (212) ----------- ----------- ----------- ----------- Other comprehensive income (loss) (95) 219 (10) 414 ----------- ----------- ----------- ----------- Comprehensive income $773 $620 $1,861 $1,481 =========== =========== =========== =========== 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) 9/30/02 9/30/01 ----------------- ------------------ Cash flows from operating activities Interest and fees received $13,131 $11,302 Interest paid (5,733) (5,835) Taxes paid (709) (1,030) Proceeds from sale of mortgages held for sale 45,690 49,054 Origination of mortgages held for sale (42,479) (50,456) Cash paid to suppliers and employees (4,972) (3,279) ----------------- ------------------ Net cash provided by (used in) operating activities 4,928 (244) Cash flows from investing activities Proceeds from maturities of securities available for sale 20,574 37,880 Proceeds from sales of securities available for sale 12,044 13,755 Proceeds from repayments of securities available for sale 454 -- Purchases of securities available for sale (31,050) (32,504) Purchase of Federal Home Loan Bank stock (33) -- Increase in loans, net of payments received (70,392) (25,719) Purchases of property and equipment (584) (1,502) ----------------- ------------------ Net cash used in investing activities (68,987) (8,090) Cash flows from financing activities Net increase in non-interest bearing deposits 14,597 2,519 Net increase in interest bearing deposits 53,494 7,703 Principal payments on mortgage payable -- (21) Proceeds from Federal Home Loan Bank advances 660 -- Repurchase of common stock -- (1,229) Issuance of shares upon exercise of stock options 31 -- ----------------- ------------------ Net cash provided by financing activities 68,782 8,972 Increase in cash and cash equivalents 4,723 638 Cash and cash equivalents at the beginning of the period 15,874 8,634 ----------------- ------------------ Cash and cash equivalents at the end of the period $20,597 $9,272 ================= ================== Reconciliation of net income to net cash provided by (used in) operating activities Net income $1,871 $1,067 Adjustments to reconcile net income to net cash provided by (used in) operating activities Provision for loan losses 888 505 Depreciation and amortization expense 297 255 Accretion of discount on securities available for sale (7) (15) Amortization of premium on securities available for sale 136 100 (Gain) loss on the sale of securities available for sale (138) 5 (Increase) decrease in mortgages held for sale 2,535 (2,065) (Increase) decrease in interest receivable (112) 439 Increase (decrease) in interest payable (195) 10 (Increase) decrease in other assets 28 (359) Decrease in other liabilities (375) (186) ----------------- ------------------ Net cash provided by (used in) operating activities $4,928 ($244) ================= ================== 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 only subsidiary, Community Bank of Dearborn (the "Bank"). The accounting and reporting policies of the Corporation are in accordance with generally accepted accounting principles and conform to practice within the banking industry. The consolidated financial statements of the Corporation as of September 30, 2002 and 2001, and December 31, 2001 and for the three and nine month periods ended September 30, 2002 and 2001 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 periods are not necessarily indicative of results of operations for the entire year. The consolidated financial statements as of September 30, 2002 and 2001, and for the three and nine months ended September 30, 2002 and 2001 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 2001 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, 2002 ---------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------------- ---------------- ---------------- ---------------- US Treasury securities $2,021 $5 $-- $2,026 Mortgage backed securities 2,517 97 -- 2,614 Municipal securities 5,000 -- -- 5,000 Corporate debt securities 6,010 13 (39) 5,984 Preferred stock 4,000 -- -- 4,000 ----------------- ---------------- ---------------- ---------------- Totals $19,548 $115 ($39) $19,624 ================= ================ ================ ================ December 31, 2001 ---------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------------- ---------------- ---------------- ---------------- US Treasury securities $2,069 $-- $-- $2,069 Mortgage backed securities 2,970 50 (7) 3,013 Municipal securities 1,476 1 -- 1,477 Corporate debt securities 11,046 73 (26) 11,093 Preferred stock 4,000 -- -- 4,000 ----------------- ---------------- ---------------- ---------------- Totals $21,561 $124 ($33) $21,652 ================= ================ ================ ================ The amortized cost and estimated market value of securities available for sale at September 30, 2002 by contractual maturity are shown below (in thousands): Estimated Amortized Market Cost Value ---------------- ---------------- Due in three months or less $-- $-- Due in three months through one year 4,021 4,038 Due in one year through five years 9,010 8,972 Due in over ten years 4,000 4,000 Mortgage backed securities 2,517 2,614 ---------------- ---------------- Totals $19,548 $19,624 ================ ================ 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 578,813 shares. Exercise price is the market price at date of grant. The maximum option term is ten years, and options become exercisable six months after the date of grant. If an option expires or terminates without having been exercised, shares covered by such option becomes available for future grant under the Plan. A summary of the option activity for the nine months ended September 30, 2002 is as follows: Weighted Weighted Average Fair Available Average Value of For Options Exercise Options Grant Outstanding Price Granted ----- ----------- ----- ------- Outstanding at January 1, 2002 243,643 312,016 $8.10 Granted (125,225) 125,225 11.46 Exercised -- (10,000) 7.70 $4.93 --------------- -------------- ----------- Outstanding at September 30, 2002 118,418 427,241 $9.09 For the options outstanding at September 30, 2002, the range of exercise prices was $5.88 to $13.25 per share with a weighted-average remaining contractual term of 7.6 years. At September 30, 2002, 420,141 options were exercisable at weighted average exercise price of $9.03 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, 2002 and 2001 (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, 2002 2001 -------------------------- ----------------------------- Net income As reported $1,871 $1,067 Pro forma 1,252 728 Basic income per share As reported $0.76 $0.41 Pro forma 0.51 0.28 Diluted income per share As reported 0.72 0.40 Pro forma 0.48 0.28 10 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, 2002 and 2001. 2002 2001 ------------------ ------------------- Risk-free interest rate 4.76% 5.12% Expected option life 8 years 8 years Dividend yield 0.00% 0.00% Expected volatility of stock price 26.06% 25.65% 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. Subsequently, branch offices were opened in Dearborn Heights and Plymouth Township. During 2001, the Bank opened its fourth and fifth offices, located at 1325 N. Canton Center Road, Canton Township, Michigan and 45000 River Ridge Drive in Clinton Township, Michigan, respectively. Additionally, Community Bank Mortgage, Inc., a mortgage company, was formed and began operations in 2001. The Bank formed Community Bank Audit Services, Inc., a subsidiary that offers internal audit and compliance services, on March 26, 2002. Additionally, the Bank intends to open an office at 19100 Hall Road in Clinton Township during November of 2002 and an office at 12820 Fort Street in Southgate during the first quarter of 2003. RESULTS OF OPERATIONS The Corporation reported net income of $868,000 and $1,871,000 for the three and nine month periods ended September 30, 2002, compared to net income of $401,000 and $1,067,000 for the three and nine month periods ended September 30, 2001. The increase in net income was primarily due to the improvements in net interest income, which is partially offset by the increase in non-interest expense. The improvement in net interest income was primarily due to the increase in the commercial real estate loan and other commercial loan portfolios and the decreasing cost of deposits during the period. Management expects net interest income to continue to increase during 2002 due to the continued growth in the loan portfolio and the continued diversification of the deposit mix with emphasis on the growth of savings, interest checking and money market accounts. NET INTEREST INCOME 2002 Compared to 2001. As noted on the charts on the following pages, net interest income for the three and nine month periods ended September 30, 2002, was $2,916,000 and $7,705,000, respectively, compared to $1,893,000 and $5,058,000 for the same periods ended September 30, 2001, an increase of $1,023,000 or 54% and $2,647,000 or 52%, respectively. This increase was caused primarily by an increase in the volume of interest earning assets and the net interest rate spread during the periods. The Corporation's interest rate spread was 3.50% and 3.29%, respectively, for the three and nine month periods ended September 30, 2002, compared to 2.92% and 2.53% for the same periods in 2001. The Corporation's net interest margin on earning assets was 4.12% and 3.88%, respectively, for the three and nine month periods ended September 30, 2002 compared to 3.87% and 3.63% for the same periods in 2001. The Corporation's improvement in interest rate spread and net interest margin was primarily the result of the Bank's ability to originate commercial loans and fund those loans with lower yielding liquid assets and lower costing deposits. Additionally, the cost of the Bank's deposits have continued to decrease as a result of the Bank's ability to adjust the deposit mix by increasing the balances in savings and other transaction-based deposit products relative to total deposits. Additionally, general industry rates have remained low throughout 2002. Management expects that both the net interest margin on earning assets and the net interest rate spread will increase during 2002 as the Bank converts funds currently held in federal funds, interest bearing deposits with banks and securities available for sale into loans. 13 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 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, 2002 2001 --------------------------------- --------------------------------- Average Average Average Average (In thousands) Balance Interest Rate Balance Interest Rate ----------- -------- ---------- ----------- --------- --------- Assets Interest-bearing deposits with banks $6,124 $25 1.62% $3,998 $40 3.98% Federal funds sold 8,488 37 1.73% 12,927 116 3.57% Securities, available for sale 30,127 296 3.91% 29,606 370 4.97% Loans 236,991 4,443 7.46% 148,033 3,155 8.48% ----------- -------- ---------- ----------- --------- --------- Total earning assets 281,730 4,801 6.78% 194,564 3,681 7.53% Other assets 8,980 10,323 ----------- ----------- Total assets $290,710 $204,887 =========== =========== Liabilities and stockholders' equity Interest bearing deposits $208,687 $1,655 3.15% $153,919 $1,781 4.60% Other borrowings 20,229 230 4.52% 448 7 6.22% ----------- -------- ---------- ----------- --------- --------- Total interest bearing liabilities 228,916 1,885 3.28% 154,367 1,788 4.61% Non-interest bearing deposits 31,071 20,875 Other liabilities 1,362 1,334 Stockholders' equity 29,361 28,311 ----------- ----------- Total liabilities and stockholders' equity $290,710 $204,887 =========== =========== Net interest income $2,916 $1,893 ======== ========= Net interest rate spread 3.50% 2.92% ========== ========= Net interest margin on earning assets 4.12% 3.87% ========== ========= 14 Nine months ended September 30, Nine months ended September 30, 2002 2001 ---------------------------------- --------------------------------- Average Average Average Average (In thousands) Balance Interest Rate Balance Interest Rate ----------- --------- ---------- ----------- --------- --------- Assets Interest-bearing deposits with banks $7,322 $83 1.52% $6,429 $214 4.46% Federal funds sold 12,694 167 1.76% 16,462 554 4.51% Securities available for sale 30,907 870 3.77% 25,836 1,040 5.40% Loans 215,454 12,123 7.54% 137,906 9,055 8.80% ----------- --------- ---------- ----------- --------- --------- Total earning assets 266,377 13,243 6.67% 186,633 10,863 7.80% Other assets 9,230 10,776 ----------- ----------- Total assets $275,607 $197,409 =========== =========== Liabilities and stockholders' equity Interest bearing deposits $199,336 $4,859 3.27% $147,100 $5,782 5.27% Other borrowings 20,077 679 4.53% 455 23 6.78% ----------- --------- ---------- ----------- --------- --------- Total interest bearing liabilities 219,413 5,538 3.38% 147,555 5,805 5.27% Non-interest bearing deposits 26,223 20,352 Other liabilities 1,174 1,336 Stockholders' equity 28,797 28,166 ----------- ----------- Total liabilities and stockholders' equity $275,607 $197,409 =========== =========== Net interest income $7,705 $5,058 ========= ========= Net interest rate spread 3.29% 2.53% ========== ========= Net interest margin on earning assets 3.88% 3.63% ========== ========= 15 Rate/Volume Analysis. The following table analyzes net interest income in terms of changes in the volume of interest-earning assets and interest-bearing liabilities and changes in yields and rates. The table reflects the extent to which changes in the interest income and interest expense are attributable to changes in volume (changes in volume multiplied by prior year rate) and changes in rate (changes in rate multiplied by prior year volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately to changes due to volume and changes due to rate. Three Months ended Nine Months Ended September 30, 2002/2001 September 30, 2002/2001 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 banks $9 ($24) ($15) ($36) ($95) ($131) Federal funds sold (20) (59) (79) (163) (224) (387) Securities available for sale 5 (79) (74) 33 (203) (170) Loans 1,666 (378) 1,288 3,901 (833) 3,068 ----------- ---------- ---------- ----------- ---------- ---------- Total earning assets $1,660 ($540) $1,120 $3,735 ($1,355) $2,380 =========== ========== ========== =========== ========== ========== Liabilities Interest bearing deposits $431 ($557) ($126) $549 ($1,472) ($923) Other borrowings 225 (2) 223 661 (5) 656 ----------- ---------- ---------- ----------- ---------- ---------- Total interest bearing liabilities $656 ($559) $97 $1,210 ($1,477) ($267) =========== ========== ========== =========== ========== ========== Net interest income $1,023 $2,647 ========== ========== Net interest rate spread 0.58% 0.76% ========== ========== Net interest margin on earning assets 0.25% 0.25% ========== ========== PROVISION FOR LOAN LOSSES 2002 Compared to 2001. The provision for loan losses was $400,000 and $888,000 for the three and nine month period ended September 30, 2002, compared to $250,000 and $505,000 for the same periods in 2001, an increase of $150,000 or 60% for the three month period and $383,000 or 76% for the nine month period. The provision for loan losses for the three and nine months ended September 30, 2002 is based on internal analysis of the adequacy of the allowance for loan losses which considers the size and composition of the loan portfolio as well as other 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. 16 NON-INTEREST INCOME 2002 Compared to 2001. Non-interest income was $579,000 and $1,130,000 for the three and nine month periods ended September 30, 2002, compared to $292,000 and $876,000 for the same periods in 2001, an increase of $287,000 or 98% for the three month period and $254,000 or 29% for the nine month period. The increase for the three month period was primarily due to increases in the gain on the sale of securities available for sale and gain on the sale of loans during the period. The increase for the nine month period was primarily due to increases in the gain on the sale of securities available for sale and service charges on deposit accounts. The securities were sold to provide additional liquidity that will be utilized to fund loan demand during the fourth quarter of 2002. NON-INTEREST EXPENSE 2002 Compared to 2001. Non-interest expense was $1,780,000 and $5,114,000 for the three and nine month periods ended September 30, 2002, compared to $1,317,000 and $3,804,000 for the same periods in 2001, an increase of $463,000 or 35% for the three month period and $1,310,000 or 34% for the nine month period. The largest component of non-interest expense was salaries and employee benefits which amounted to $1,156,000 and $3,260,000 for the three and nine month periods ended September 30, 2002, compared to $843,000 and $2,442,000 for the same periods in 2001, an increase of $313,000 or 37% for the three month period and $818,000 or 33% for the nine month period. The primary factor in the increase in salaries and benefits expense was the addition of two branch offices during the second half of 2001, the expansion of the lending and operations departments and general staff increases. As of September 30, 2002, the number of full time equivalent employees was 81 compared to 55 as of September 30, 2001. Salaries and employee benefits will continue to increase with the opening of a branch office during the fourth quarter of 2002, preparation for the opening of a branch office during the first quarter of 2003 and general staff increases. Two other components of the increase in non-interest expense were occupancy and equipment expense and other operating expense. Occupancy and equipment expense amounted to $240,000 and $683,000 for the three month and nine month periods ended September 30, 2002, compared to $183,000 and $424,000 for the same periods in 2001, an increase of $57,000 or 31% for the three month period and $259,000 or 61% for the six month period. Other operating expense amounted to $182,000 and $478,000 for the three month period and nine month period ended September 30, 2002, compared to $113,000 and $326,000 for the same periods in 2001, an increase of $57,000 or 31% for the three month period and $259,000 or 61% for the nine month period. The primary factor in the increase in occupancy and equipment expense and other operating expense was the opening of branch offices in Canton Township, Michigan and Clinton Township, Michigan. The Bank also completed the construction of an addition to the Bank's main office in Dearborn, Michigan in December 2001. During 2002, the Bank will open a retail branch at 19100 Hall Road in Clinton Township in front of the current offices in the River Ridge Corporate Office Center Building. Construction of this project commenced during the second quarter of 2002. Upon completion during the fourth quarter of 2002, the retail branch staff will move to the retail branch office while loan, operations and administrative personnel will remain in the existing building. Additionally, the Bank expects to open a branch office in Southgate during the first quarter of 2003. 17 INCOME TAX PROVISION 2002 Compared to 2001. Income tax expense was $447,000 and $962,000 for the three and nine month periods ended September 30, 2002, compared to $217,000 and $558,000 for the same periods in 2001, an increase of $230,000 or 106% for the three month period and $404,000 or 72% for the nine month period. The increase was primarily a result of increased pre-tax income and the effective tax rate was approximately 34% in all periods. 18 COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2002 AND DECEMBER 31, 2001 Assets. Total assets at September 30, 2002 were $296,938,000 compared to $226,865,000 at December 31, 2001, an increase of $70,073,000 or 31%. The increase was primarily due to the increase in loans. The increase in loans was funded primarily with deposits. Federal Funds Sold. Total federal funds sold at September 30, 2002 were $9,670,000 compared to $4,887,000 at December 31, 2001, an increase of $4,783,000 or 98%. The increase was primarily due to the short term deployment of funds that were received as a result of an increase in deposits and the sale of securities available for sale during the period. These funds are deployed into federal funds sold until they can be utilized to fund loan volume. Interest bearing deposits with banks. Total interest bearing deposits with banks at September 30, 2002 were $6,751,000 compared to $7,387,000 at December 31, 2001, a decrease of $636,000 or 9%. This decrease was due to the deployment of these funds into loans. 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 September 30, 2002 were $380,000 compared to $2,915,000 at December 31, 2001, a decrease of $2,535,000 or 87%. This decrease was primarily due to the Bank's ability to receive funding more rapidly. The Bank has accelerated this process by selling mortgage loans to correspondents that complete these transactions more rapidly. Securities Available for Sale. Total securities available for sale at September 30, 2002 were $19,624,000 compared to $21,652,000 at December 31, 2001, a decrease of $2,028,000 or 9%. The decrease was due to the sale of securities available for sale during the period. The securities were sold during the third quarter of 2002 with a realized gain of $138,000 and the funds from the sale of these securities will be utilized to a fund loans during the fourth quarter of 2002. The entire portfolio has a net unrealized gain of $76,000. The Corporation does not hold any securities in the "Held to Maturity" category nor does the Corporation hold or utilize derivatives. Please refer to Note B for the amortized cost and estimated market value of securities, available for sale. Federal Home Loan Bank Stock. Federal Home Loan Bank stock was valued at $1,033,000 at September 30, 2002, compared to $1,000,000 at December 31, 2001, an increase of $33,000 or 3%. 19 Loans. Total loans at September 30, 2002 were $251,174,000 compared to $180,892,000 at December 31, 2001, an increase of $70,282,000 or 39%. The increase was primarily due to the expansion of the commercial lending department during 2001. This expansion included the addition of two experienced commercial loan officers at the Bank's branch office in Clinton Township, Michigan and the development of the surrounding region. This expansion continued in 2002, with the addition of an experienced commercial loan officer at the main office in Dearborn, Michigan during the second quarter of 2002 and an experienced commercial loan officer at the Clinton Township branch office during the third quarter of 2002. Major categories of loans included in the loan portfolio are as follows (in thousands): 09/30/02 12/31/01 09/30/01 ----------------- ---------------- ------------------ Consumer loans $22,326 $18,773 $18,189 Commercial, financial, & other $44,109 28,920 24,075 Commercial real estate construction $23,514 10,463 7,711 Commercial real estate mortgages $129,141 90,200 70,693 Residential real estate mortgages 32,084 32,536 32,969 ----------------- ---------------- ------------------ 251,174 180,892 153,637 Allowance for loan losses (2,700) (1,922) (1,571) ----------------- ---------------- ------------------ $248,474 $178,970 $152,066 ================= ================ ================== The following is a summary of non-performing assets and problems loans (in thousands): 09/30/02 12/31/01 09/30/01 ----------------- ---------------- ------------------ Over 90 days past due and still accruing $2 $364 $314 Non-accrual loans 2,743 427 720 ----------------- ---------------- ------------------ $2,745 $791 $1,034 ================= ================ ================== Non-accrual loans at September 30, 2002 were $2,743,000, of which, $1,955,000 was related to one commercial loan relationship that is well secured. The remaining non-accrual loans consisted of two residential mortgage loans in bankruptcy proceedings with balances of $289,000 and $45,000 and two slow paying commercial loans with balances of $278,000 and $176,000. 20 Allowance for Loan Losses. The allowance for loan losses was $2,700,000 at September 30, 2002 compared to $1,922,000 at December 31, 2001, an increase of $778,000 or 40%. 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. The following is an analysis of the allowance for loan losses (in thousands): Nine Months Ended Year Ended Nine Months Ended 09/30/02 12/31/01 09/30/01 ------------------------ ------------------- ------------------------- Balance, beginning of year $1,922 $1,252 $1,252 Charge-offs: Consumer loans (20) (43) (43) Commercial loans (133) (251) (180) Recoveries: Consumer loans 4 32 27 Commercial loans 39 12 10 ------------------------ ------------------- ------------------------- Net charge-offs (110) (250) (186) Additions charged to operations 888 920 505 ------------------------ ------------------- ------------------------- Balance, end of period $2,700 $1,922 $1,571 ======================== =================== ========================= Allowance to total loans 1.07% 1.06% 1.02% ======================== =================== ========================= Allowance to nonperforming assets 98.36% 242.98% 151.93% ======================== =================== ========================= Net charge-offs to average loans 0.05% 0.17% 0.13% ======================== =================== ========================= Premises and Equipment. Bank premises and equipment at September 30, 2002 was $5,033,000 compared to $4,746,000 at December 31, 2001, an increase of $287,000 or 6%. Accrued Interest Receivable. Accrued interest receivable at September 30, 2002 was $1,197,000 compared to $1,085,000 at December 31, 2001, an increase of $112,000 or 10%. The increase was primarily due to the increase in the Bank's loan portfolio. Other Assets. Other assets at September 30, 2002 were $600,000 compared to $623,000 at December 31, 2001, a decrease of $23,000 or 4%. The increase was primarily due to changes in deferred tax assets. 21 Deposits. Total deposits at September 30, 2002 were $245,572,000 compared to $177,481,000 at December 31, 2001, an increase of $62,046,000 or 38%. The following is a summary of the distribution of deposits (in thousands): 09/30/02 12/31/01 09/30/01 ----------------------- -------------------- -------------------- Non-interest bearing: Demand $36,038 $21,441 $21,672 ----------------------- -------------------- -------------------- Interest bearing: Checking 12,419 9,263 8,577 Money market 15,744 20,545 21,093 Savings 56,499 37,429 39,628 Time, under $100,000 63,703 38,667 39,203 Time, $100,000 and over 61,169 50,136 44,170 ----------------------- -------------------- -------------------- 209,534 156,040 152,671 ----------------------- -------------------- -------------------- Total deposits $245,572 $177,481 $174,343 ======================= ==================== ==================== The increase in deposits was primarily due to normal business development, marketing, telemarketing, referral programs and growth strategies which included a grand opening promotion for the Bank's branch office in Clinton Township, Michigan, which targeted time deposit growth and an annual birthday celebration and marketing campaign in March 2002. Management also continued the implementation of a strategy during 2002 to change the mix of the deposit portfolio by focusing more heavily on demand, interest bearing checking, savings and money market, while reducing its reliance on time deposits. The implementation of this strategy will continue during the remainder of 2002. Federal Home Loan Bank Advances. Federal Home Loan Bank advances at September 30, 2002 were $20,660,000 compared to $20,000,000 at December 31, 2001, an increase of $660,000 or 3%. The funds from this Federal Home Loan Bank advance were utilized to provide funding for a commercial loan. Accrued Interest Payable. Accrued interest payable at September 30, 2002 was $609,000 compared to $804,000 at December 31, 2001, a decrease of $195,000 or 24%. The decrease was primarily due to the decreasing cost of interest bearing deposits during the period. Other Liabilities. Other liabilities at September 30, 2002 were $302,000 compared to $677,000 at December 31, 2001, a decrease of $375,000 or 55%. The decrease was primarily due to the decrease in expenses payable during the period. 22 CAPITAL Stockholders' equity at September 30, 2002 was $29,795,000 compared to $27,903,000 as of December 31, 2001, an increase of $1,892,000 or 7%. In prior years, the Corporation had announced that it would repurchase up to 406,874 shares of its outstanding common stock under three stock repurchase programs. Through December 31, 2001, the Corporation was able to repurchase 393,624 shares within Securities and Exchange Commission guidelines primarily related to the volume of market activity. Considering that the Corporation's stock closed at $13.130 per share on September 30, 2002, representing a 109 percent market to book ratio and the Corporation's plans for continued expansion, the Corporation is not planning to repurchase shares during 2002. No shares were repurchased during the first nine months of 2002. 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, 2002 Total capital (to risk weighted assets) Consolidated 32,446 12.5% 20,687 8.0% 25,859 10.0% Bank 26,827 10.5% 20,354 8.0% 25,442 10.0% Tier 1 capital (to risk weighted assets) Consolidated 29,746 11.5% 10,344 4.0% 15,515 6.0% Bank 24,127 9.5% 10,177 4.0% 15,265 6.0% Tier 1 capital (to average assets) Consolidated 29,746 10.2% 11,628 4.0% 14,536 5.0% Bank 24,127 8.5% 11,418 4.0% 14,273 5.0% As of December 31, 2001 Total capital (to risk weighted assets) Consolidated 29,765 14.2% 16,735 8.0% 20,939 10.0% Bank 20,170 10.1% 16,056 8.0% 20,090 10.0% Tier 1 capital (to risk weighted assets) Consolidated 27,843 13.3% 8,367 4.0% 12,563 6.0% Bank 18,249 9.1% 8,028 4.0% 12,054 6.0% Tier 1 capital (to average assets) Consolidated 27,843 12.9% 8,654 4.0% 10,817 5.0% Bank 18,249 8.9% 8,183 4.0% 10,229 5.0% Based on the respective regulatory capital ratios at September 30, 2002 and December 31, 2001, 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. 24 PART I - FINANCIAL INFORMATION ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Sensitivity Analysis. 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. 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. 25 Different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, and thus changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category. Additionally, the gap analysis does not consider the many factors as banking interest rates move. While the interest rate sensitivity gap is a useful measurement and contributes toward effective asset and liability management, it is difficult to predict the effect of changing interest rates solely on that measure, without accounting for alterations in the maturity or repricing characteristics of the balance sheet that occur during changes in market interest rates. During periods of rising interest rates, the Corporation's assets tend to have prepayments that are slower than those in an interest rate sensitivity gap and would increase the negative gap position. Conversely, during a period of declining interest rates, the Corporation's assets would tend to prepay faster than originally expected thus decreasing the negative gap position. In addition, some of the Corporation's assets, such as adjustable rate mortgages, have caps on the amount by which their interest rates can change in any single period, and therefore may not reprice as quickly as liabilities in the same maturity category. The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at September 30, 2002, which are expected to mature or reprice in each of the time periods shown below. ----------------------------------------------------------------- (In thousands) 1-90 91-365 1-5 Over Days Days Years 5 Years Total ------------ ------------ ---------- ------------ ------------ Earning assets Federal funds sold $9,670 $--- $--- $--- $9,670 Interest bearing deposits with banks 6,751 --- --- --- 6,751 Mortgage loans held for sale 380 --- --- --- 380 Securities available for sale 5,928 9,071 2,440 2,185 19,624 Federal Home Loan Bank stock 1,033 --- --- --- 1,033 Total loans (1) 71,849 16,543 147,545 12,494 248,431 ------------ ------------ ---------- ------------ ------------ Total earning assets 95,611 25,614 149,985 14,679 285,889 Interest bearing liabilities Time deposits 16,662 94,639 13,571 --- 124,872 Other interest bearing deposits 84,662 --- --- --- 84,662 Federal Home Loan Bank advances --- --- 10,660 10,000 20,660 ------------ ------------ ---------- ------------ ------------ Total interest bearing liabilities 101,324 94,639 24,231 10,000 230,194 Net asset (liability) funding gap (5,713) (69,025) 125,754 4,679 $55,695 ------------ ------------ ---------- ------------ ============ Cumulative net asset (liability) funding gap ($5,713) ($74,738) $51,016 $55,695 ============ ============ ========== ============ (1) Total loans do not include non-accrual loans. 26 PART I - FINANCIAL INFORMATION ITEM 4. - DISCLOSURE CONTROLS AND PROCEDURES Within the 90-day period prior to the filing date of this report, an evaluation was carried out under the supervision and with the participation of Dearborn Bancorp Inc.'s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by Dearborn Bancorp Inc. in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that there were no significant changes in Dearborn Bancorp Inc.'s internal controls or in other factors that could significantly affect its internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. 27 DEARBORN BANCORP, INC. AND SUBSIDIARY FORM 10-Q (continued) PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS IN FORM 8-K. (a) A Form 8-K Report was not filed during the three months ended September 30, 2002. 28 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 /s/ Michael J. Ross ------------------------------- Michael J. Ross President and Chief Executive Officer /s/ Jeffrey L. Karafa ------------------------------- Jeffrey L. Karafa Treasurer and Chief Financial Officer Date: November 12, 2002 29 DEARBORN BANCORP, INC. FORM 10-Q (continued) CERTIFICATION I, Michael J. Ross, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Dearborn Bancorp, Inc. (the "registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 30 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Michael J. Ross -------------------------------- Michael J. Ross President and Chief Executive Officer Dearborn Bancorp, Inc. 31 DEARBORN BANCORP, INC. FORM 10-Q (continued) CERTIFICATION I, Jeffrey L. Karafa, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Dearborn Bancorp, Inc. (the "registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 32 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Jeffrey L. Karafa -------------------------------- Jeffrey L. Karafa Treasurer and Chief Financial Officer, Dearborn Bancorp, Inc. 33 10-Q EXHIBIT INDEX EXHIBIT NO. DESCRIPTION EX-99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EX-99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002