EXHIBIT 13
[DEARBORN BANCORP INC. LOGO]
and its subsidiary
[COMMUNITY BANK OF DEARBORN LOGO]
2004
ANNUAL REPORT
DEARBORN BANCORP, INC.
AND ITS SUBSIDIARY
COMMUNITY BANK OF DEARBORN
CONTENTS
Corporate Information........................................................... 3
Chairman's and President's Letter to Stockholders............................... 4
Summary of Selected Financial Data.............................................. 9
Report of Independent Auditors.................................................. 10
Consolidated Balance Sheets..................................................... 11
Consolidated Statements of Income............................................... 12
Consolidated Statements of Changes in Stockholders' Equity...................... 13
Consolidated Statements of Cash Flows........................................... 15
Notes to Consolidated Financial Statements...................................... 17
Management's Discussion and Analysis............................................ 43
Dearborn Bancorp, Inc. Directors and Officers................................... 65
Community Bank of Dearborn Directors and Executive Officers..................... 66
Community Bank of Dearborn Officers............................................. 67
Community Bank of Dearborn Subsidiaries......................................... 68
Investor Information............................................................ 70
2
DESCRIPTION OF BUSINESS
DEARBORN,BANCORP, INC.
Dearborn Bancorp, Inc. (the "Parent Company" and, together with its subsidiary,
the "Corporation") is a registered bank holding company which was incorporated
on September 30, 1992. The primary purpose of the holding company is to own and
operate the subsidiary bank, Community Bank of Dearborn (the "Bank"). Dearborn
Bancorp, Inc. trades on the Nasdaq National Market under the symbol "DEAR".
COMMUNITY BANK OF DEARBORN
The Bank was incorporated on June 28, 1993 and began operations as a state
chartered commercial bank on February 28, 1994 from its main office located on
Michigan Avenue in Dearborn. Subsequently, branch offices were opened in
Dearborn Heights, Plymouth Township, Canton Township and Clinton Township. On
February 13, 2003, the Bank opened a branch office in Southgate, Michigan. The
Bank opened a regional lending center and branch office in Auburn Hills,
Michigan on May 15, 2003. The Bank consolidated the three branches of the Bank
of Washtenaw, acquired by the Corporation on October 29, 2004 into the Bank's
operations. This consolidation included a branch office in Saline, Michigan, a
branch office in Ann Arbor, Michigan and a regional lending center in Ann Arbor,
Michigan.
The Bank offers a wide range of financial products and services. These include
checking accounts, savings accounts, money market accounts, certificates of
deposit, business checking, direct deposit, ATM services, telephone banking
services, loan services (commercial, consumer, real estate mortgages),
travelers' checks, cashiers' checks, wire transfers, safe deposit boxes,
collection services, night depository service and internet banking services. The
Bank does not have a trust department.
COMMUNITY BANK INSURANCE AGENCY, INC.
On August 19, 1997, the Bank formed Community Bank Insurance Agency, Inc. This
company conducts limited insurance-related activities and holds a minority
interest in Michigan Bankers Title Company of East Michigan, LLC, a title
insurance company.
COMMUNITY BANK MORTGAGE, INC.
On May 1, 2001, the Bank formed Community Bank Mortgage, Inc., a mortgage
company that originates and holds commercial and residential mortgage loans.
COMMUNITY BANK AUDIT SERVICES, INC.
On March 13, 2002, the Bank formed Community Bank Audit Services, Inc., a
company that offers internal auditing and compliance services to financial
institutions.
3
To Our Stockholders:
Sustained growth and profitability are probably the two most important
characteristics of a successful business enterprise beyond strict adherence to
sound ethical principles.
Other than to state that we insist that the officers and employees of Dearborn
Bancorp treat every customer, supplier, outside contact and each other fairly
and honestly, evaluation of our ethical practices is a highly subjective matter
best left to others. Evaluation of our growth and profitability, however, is a
matter of objective measurement and clearly indicates that our organization has
been even more successful than those of us who helped organize the company in
1993 hoped that it would be.
Every year since Community Bank of Dearborn opened for business eleven years ago
has been a "good" year and almost every year has been marked by a much better
performance than the previous year. The progress we recorded in 2004 was no
exception and, in fact, undoubtedly made it the best year in our relatively
short history.
Our net income for the twelve months ended December 31, 2004, was $5,509,000 or
$1.28 per fully diluted common share. This represented a 56.5 percent increase
over 2003 earnings of $3,521,000 or $1.01 per diluted common share. During the
year, total assets increased by 46.3 percent to $652,662,000. They had been
$446,075,000 at the end of 2003. Total deposits grew to $540,880,000, 42.5
percent more than they had been one year earlier. They had been $379,619,000 at
the end of 2003. Total loans went up by 46.5 percent to $587,562,000 from
$400,958,000 over the twelve-month period.
In keeping with our practice in previous years, the Board of Directors ensured
that our stockholders shared in our progress by declaring two five percent stock
dividends. One was distributed in June 2004 and the second in December 2004. We
do not anticipate paying cash dividends until such time as our growth rate can
be supported solely through retention of a modest portion of earnings. In the
meantime, however, stock dividends have been an appropriate means of rewarding
our stockholders for their loyalty.
Stockholders' equity was $74,604,000 at the end of 2004 while it had been
$34,601,000 one year earlier. This increase of more than $40 million was, in
large part, the consequence of a highly successful offering of approximately 1.5
million new common shares at a price of $24.76 per share during July. The
offering was underwritten and managed by Oppenheimer & Co. and co-managed by
Howe Barnes Investments, Inc. The proceeds of this offering will provide the
capital we need to support our growth and expansion over the foreseeable future.
While we have become a profitable enterprise, retained earnings alone simply
would not have allowed us to expand our asset base as fast as we would like and
will now be able to do.
The fact that the investment community was willing to provide us with more than
$34 million in new capital through an oversubscribed stock offering speaks
volumes about our organization's performance in recent years. Sophisticated
investors, both institutions and individuals, looked at our record, liked what
they saw and gave us a vote of confidence with their "buy" orders for our
shares. Now, the challenge facing our directors and officers will be to
demonstrate to our new investors that their trust in us was not misplaced. And
we assure all concerned ... old and new investors alike ... that we shall
certainly strive to do so.
Among other things, the success of our stock offering allowed us to pay $15.1
million in cash to acquire Bank of Washtenaw in Ann Arbor, Michigan, from
Pavilion Bancorp of Adrian, Michigan. This transaction closed as of October 30,
2004. It added approximately $85 million to our total assets, about $66 million
to our deposit base and some $67 million to our loan portfolio. But more
important, it gave us three full-service banking offices in the prosperous and
fast-growing Washtenaw County market. Two of these offices, which are now
branches of Community Bank of Dearborn, are in the city of Ann Arbor and the
third is in the nearby community of Saline. In the years ahead, we anticipate
that our approach to the business of banking will be just as successful in
Washtenaw County as it has been in Wayne, Oakland and Macomb Counties.
It should be noted that this acquisition was accounted for as a purchase. This
means that the earnings at the three former Bank of Washtenaw offices were only
included in our Statement of Income from the date of the closing until the end
of the year.
4
Two other developments during the year will also have long-term benefits for our
organization and merit mention in this letter. First, we purchased the building
on Porter Street in Dearborn that has housed our corporate offices in recent
years. This provided a degree of stability to our organization that we had not
enjoyed as a tenant and allowed us to relieve severe overcrowding at our Main
Office on Michigan Avenue by relocating many of our lenders and loan support
activities to the newly acquired building. We now consider this facility our
Wayne County Regional Lending Center.
The operation of Regional Lending Centers has now become an integral part of our
business plan and we have other centers in Ann Arbor (Washtenaw Center), Auburn
Hills (Oakland Center) and Clinton Township (Northeast Center). These centers
allow us to bring our senior commercial lenders and their support staff together
where they can share their knowledge and experience with each other and provide
our customers with appropriate levels of service at all times.
The success of this approach is evident from the quality of our loan portfolio.
During all of 2004, net charge-offs (charge-offs less recoveries) were just
$14,000, an insignificant amount in comparison to our total loan portfolio of
$587.6 million. Moreover, we added $1,400,000 to the Allowance for Loan Losses
during the year to bring the total allowance to one percent of total loans at
year-end. Non-performing loans of $3.2 million at year-end were only slightly
more than one-half of one percent of total loans.
It bears repeating that our business plan calls for aggressive salesmanship by
our lenders but we will never "buy" business by compromising credit quality. It
has been said that almost anyone can make a loan but professional bankers make
loans that get repaid. The record suggests that our lenders have been, and are,
professional bankers.
The second of these two important developments was the opening of our new
Operations Center in Allen Park. This facility houses our data processing,
accounting, auditing, compliance, customer support, and mortgage operations
activities. For most of our 11 years of doing business, we were able to
comfortably house these key functions in backrooms of our various offices. This
was not always the most efficient way to do business but it made productive use
of all our available space and kept occupancy expense low. As we have grown,
however, inefficiency and overcrowding began to offset any savings in occupancy
expense and it became clear that our continued progress would require us to
bring all of our "backroom" activities together in one modern building. With the
opening of the new Operations Center, we will achieve a level of efficiency and
effectiveness in the key areas housed there that will be an important component
in our future success.
Overall, 2004 was a splendid year for our organization. We grew more than we had
grown in any year since we commenced operations more than 11 years ago. We
earned more than $1 million in every quarter of the year and posted annual net
income of more than $5 million for the first time. We had a highly successful
stock offering that will allow us to sustain our growth rate throughout the
foreseeable future. We expanded our operations into Washtenaw County where the
University of Michigan has, for many years, been an engine for growth and
prosperity through its own operations as well as the entrepreneurial spin-offs
of its scholars. And we have met many of our long-term space requirements
through the purchase of our administrative office building and a new Operations
Center.
As we begin 2005, we have twelve banking offices spread across the four most
populous counties in Southeast Michigan. Our company is growing at a rapid pace
and consistently profitable. We are continuing to implement a business plan that
has demonstrated over more than a decade that it satisfies the financial needs
of those people and corporations that have favored us with their patronage. For
that reason, all of us associated with the direction and management of Dearborn
Bancorp, Inc., anticipate compounding success in 2005 and for many years to
come.
5
There are some naysayers who might suggest that we should temper our optimism
because of the less-than-favorable economic conditions throughout our Southeast
Michigan market. That suggestion would probably be justified if our long-term
objective were to become a multi-billion dollar megabank. But that is not our
goal. Rather, we intend to become the leading community banking organization in
and around the Detroit Metropolitan area. Our customers and prospects are
individuals and small and mid-sized business entities that appreciate the highly
responsive and flexible products and services that we offer. We can do this
because our directors and officers live and work in the communities where we do
business and can respond quickly to the changing situation around them. And,
perhaps most important of all, we are a banking company where the pages of an
inflexible policy manual will never take precedence over the sound judgment of
seasoned and competent bankers.
Moreover, Southeast Michigan is a huge market, one of the ten largest in the
United States. To achieve all of our goals, and even to exceed them, will only
require us to capture a very small share of the banking business being done in
this area. We think that our track record since opening for business on February
28, 1994, demonstrates that we have both the plan and the ability to attract the
necessary market share.
We believe that we have made the investments in infrastructure and human
resources and built the geographic framework that will enable the organization
to succeed in the future as we have in the past. These investments will enable
us to continue to offer the competitive products and services that meet the
needs and desires of our customers. We will continue to overcome obstacles that
we are certain to encounter in our path and take advantage of business
opportunities in the marketplace in the upcoming years. We realize that we can
only succeed as an organization in the long term by continuing to offer superior
service to our customers.
We are confident that we know what we are and where we are. We know where we
want to go. And we have shown that we know how to get there.
Our Annual Meeting will be held on May 17, 2005 at 4:00 PM at Park Place in
Dearborn. All of our directors and officers hope that you will be able to be
with us at this important event. We look forward to reporting to you more fully
on our business, answering your questions and hearing your comments and
suggestions. In a real sense the support of our stockholders has been a key
ingredient in our recipe for success and we certainly realize that we will need
it in the future to sustain our progress.
Sincerely,
John E. Demmer Michael J. Ross
Chairman of the Board President and
Chief Executive Officer
6
SUMMARY OF SELECTED FINANCIAL DATA
The following selected consolidated financial and other data as of and for each
of the five years in the period ended December 31, 2004 should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Consolidated Balance Sheets as of December 31, 2004 and 2003,
and the Consolidated Statements of Income for the years ended December 31, 2004,
2003 and 2002 are included elsewhere in this Annual Report.
(In thousands, except share and per share data) 2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
OPERATIONS
Interest income $ 29,790 $ 23,564 $ 18,259 $ 14,585 $ 12,789
Interest expense 9,409 8,631 7,505 7,405 6,733
----------- ----------- ----------- ----------- -----------
Net interest income 20,381 14,933 10,754 7,180 6,056
Provision for loan losses 1,400 1,699 1,052 920 510
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan
losses 18,981 13,234 9,702 6,260 5,546
Total non-interest income 1,332 2,829 1,674 1,460 542
Total non-interest expense 11,967 10,735 7,372 5,379 4,259
----------- ----------- ----------- ----------- -----------
Net income before federal income tax expense 8,346 5,328 4,004 2,341 1,829
Income tax expense 2,837 1,807 1,357 802 618
----------- ----------- ----------- ----------- -----------
Net income $ 5,509 $ 3,521 $ 2,647 $ 1,539 $ 1,211
=========== =========== =========== =========== ===========
FINANCIAL CONDITION
Total assets $ 652,662 $ 446,075 $ 325,100 $ 226,865 $ 193,878
Mortgage loans held for sale 1,692 1,505 9,852 2,915 1,085
Investment securities, available for sale 21,075 16,948 22,216 21,652 51,916
Federal Home Loan Bank stock 1,122 1,073 1,033 1,000 450
Loans 587,562 400,958 267,522 180,892 128,104
Allowance for loan losses (5,884) (4,314) (2,875) (1,922) (1,252)
Other assets 26,226 8,757 7,902 6,454 4,941
Deposits 540,880 379,619 262,086 177,481 164,121
Federal Home Loan Bank advances 20,614 20,638 20,660 20,000 -
Subordinated debt 10,000 10,000 10,000 - -
Securities sold under agreements to repurchase 4,115 - - - 467
Other liabilities 2,449 1,217 1,663 1,481 1,527
Stockholders' equity 74,604 34,601 30,691 27,903 27,763
PER SHARE INFORMATION (1)
Net income per common share - basic $ 1.40 $ 1.10 $ 0.84 $ 0.47 $ 0.34
Net income per common share - diluted $ 1.28 $ 1.01 $ 0.80 $ 0.46 $ 0.34
Book value per common share $ 15.56 $ 10.67 $ 9.66 $ 8.42 $ 7.51
Average shares outstanding - basic 3,922,423 3,215,181 3,160,510 3,269,823 3,514,828
Average shares outstanding - diluted 4,292,319 3,493,853 3,322,511 3,338,521 3,519,081
Shares outstanding at end of period 4,794,012 3,243,919 3,177,354 3,312,868 3,694,891
OTHER DATA
Return on average assets 1.05% 0.89% 0.93% 0.76% 0.72%
Return on average equity 10.56% 10.80% 9.08% 5.46% 4.41%
Net interest margin 4.04% 3.97% 3.94% 3.76% 3.74%
Net interest spread 3.69% 3.63% 3.37% 2.91% 2.41%
Allowance for loan losses to total loans 1.00% 1.08% 1.07% 1.06% 0.98%
Nonperforming assets to total assets 0.47% 0.42% 0.84% 0.35% 0.55%
Stockholders' equity to total assets 11.43% 7.76% 9.44% 12.30% 14.32%
Total interest expense to gross interest income 31.58% 36.63% 41.10% 50.77% 52.65%
Number of offices 12 8 6 5 3
(1) All share and per share amounts have been adjusted to reflect the issuance
of stock dividends.
7
COMMITMENT TO COMMUNITY
Commitment to community is one of the primary principles upon which
Dearborn Bancorp, Inc. and its primary subsidiary, Community Bank of Dearborn
was founded. Since the Community Bank of Dearborn opened for business in 1994,
management has emphasized the importance of community involvement and community
development as part of the Bank's mission. In fact, the majority of the Bank's
directors, officers and employees live in the communities that are serviced by
the Bank. During 2004, the Bank provided the following local organizations with
financial support or personal involvement:
Agape Christian Academy, Canton Dearborn Kiwanis
American Arab Chamber of Commerce Dearborn Optimist Club
American Red Cross Dearborn Outer Drive Kiwanis
Ann Arbor Chamber of Commerce Dearborn Rotary Club
Ann Arbor Symphony Orchestra Dearborn Senior Center
Auburn Hills Chamber of Commerce Dearborn Symphony Orchestra
Canton Chamber of Commerce Dearborn Youth Symphony
Canton Community Foundation Divine Child High School
Canton Exchange Club Downriver Senior Olympics
Canton Firefighters Festival of Trees
Canton Library Fiddle Ensemble (Saline Fiddlers)
Canton Liberty Festival Fore Dearborn
Canton Lion's Club Foundation for Saline Area Schools
Canton Senior Safety Coalition Friends of Northville Parks & Recreation
Central Macomb Chamber of Commerce Garden City Hospital
Community Hospice Garden City Hospital Foundation
Canton Senior Center Gilbert Residence
Davenport University Foundation Girl Scouts of Macomb County
Dearborn Baseball Garden Club of Dearborn
Dearborn Board of Realtors Goodwill Industries of Greater Detroit
Dearborn Chamber of Commerce Greater Detroit Chamber of Commerce
Dearborn Community Arts Council Henry Ford Community College Foundation
Dearborn Elderfest Henry Ford Museum
Dearborn Exchange Club Holiday on the Avenue, Dearborn
Dearborn Goodfellows Humane Society of Livingston County
Dearborn Heights Chamber of Commerce Huron Valley Boys and Girls Club
Dearborn Heights DARE Islamic Center of America
Dearborn Heights Lions Club Junior League Goodwill
Dearborn Heights Park & Recreation Karmanos Cancer Institute
Dearborn Heights Spirit Festival Kiwanis Eastpointe
Dearborn Heights Rotary Club Kiwanis - Greater Macomb
Dearborn Historical Society Lawton School Run A Thon
Dearborn Homecoming
8
COMMITMENT TO COMMUNITY
(Continued)
Macomb Symphony Orchestra Southern Wayne County Chamber of Commerce
Michigan Foundation Starfish Family Services
Mike Adray Memorial Foundation St. Joseph Hospital
Mount Clemens Lions Club St. Mary Mercy Hospital
New Morning School Taste of Northville
National Kidney Foundation of Michigan Trenton Rotary Club
Northville Chamber of Commerce Turning Point
Northville Community Foundation University of Michigan - Dearborn
Oakwood Health Care Foundation United Way
Operation Kindness Vista Maria
Perry Nursery School Warren Symphony Society
Plymouth Canton Educational Excellence Foundation Washtenaw Community College Foundation
Plymouth Chamber of Commerce Washtenaw Development Council
Plymouth Christian Academy Washtenaw Housing Alliance
Plymouth Community Arts Center Wayne County Community College
Plymouth Symphony Wayne County Treasurers Association
Royal Oak Police Wayne Metro Community Action Agency
Saint Joseph Mercy Saline Hospital Western Wayne Association of Realtors
Saline Area Chamber of Commerce Westland Foundation
Saline Celtic Festival West Village Merchants Association
Saline Christmas In Action Wyandotte Catholic Consolidated School
Saline Rotary Club Wyandotte Scholarship Foundation
Showcase Plymouth YWCA of Western Wayne County
Sig Krug Memorial Foundation Youth Leadership Plymouth
9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Dearborn Bancorp, Inc. and Subsidiary
Dearborn, Michigan
We have audited the accompanying consolidated balance sheets of Dearborn
Bancorp, Inc. and subsidiary as of December 31, 2004 and 2003, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Dearborn Bancorp, Inc. and subsidiary as of December 31, 2004 and 2003, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2004, in conformity with U. S. generally accepted
accounting principles.
Crowe Chizek and Company LLC
Grand Rapids, Michigan
February 25, 2005
10
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------
(Dollars in thousands) 2004 2003
--------- ---------
ASSETS
Cash and cash equivalents
Cash and due from banks $ 5,946 $ 5,172
Federal funds sold 12,640 7,651
Interest bearing deposits with banks 2,283 8,325
--------- ---------
Total cash and cash equivalents 20,869 21,148
Mortgage loans held for sale 1,692 1,505
Securities, available for sale 21,075 16,948
Federal Home Loan Bank stock 1,122 1,073
Loans
Loans 587,562 400,958
Allowance for loan loss (5,884) (4,314)
--------- ---------
Net loans 581,678 396,644
Bank premises and equipment, net 13,124 5,554
Real estate owned 138 -
Goodwill 7,080 -
Other intangible assets 902 -
Accrued interest receivable 1,889 1,461
Other assets 3,093 1,742
--------- ---------
Total assets $ 652,662 $ 446,075
========= =========
LIABILITIES
Deposits
Non-interest bearing deposits $ 63,065 $ 39,081
Interest bearing deposits 477,815 340,538
--------- ---------
Total deposits 540,880 379,619
Other liabilities
Securities sold under agreements to repurchase 4,115 -
Federal Home Loan Bank advances 20,614 20,638
Accrued interest payable 1,107 754
Other liabilities 1,342 463
Subordinated debentures 10,000 10,000
--------- ---------
Total liabilities 578,058 411,474
STOCKHOLDERS' EQUITY
Common stock - no par value 5,000,000 shares
authorized, 4,794,012 and 3,243,919 shares
outstanding in 2004 and 2003, respectively 74,918 34,451
Retained earnings 344 128
Accumulated other comprehensive income (loss) (658) 22
--------- ---------
Total stockholders' equity 74,604 34,601
--------- ---------
Total liabilities and stockholders' equity $ 652,662 $ 446,075
` ========= =========
The accompanying notes are an integral part of these consolidated statements.
11
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
----------------------------------------
(In thousands, except share data) 2004 2003 2002
----------- ----------- -----------
Interest income
Interest on loans $ 29,040 $ 22,764 $ 16,904
Interest on investment securities, available for sale 460 522 1,044
Interest on deposits with banks 129 153 107
Interest on federal funds 161 125 204
----------- ----------- -----------
Total interest income 29,790 23,564 18,259
Interest expense
Interest on deposits 8,013 7,212 6,575
Interest on other liabilities 1,396 1,419 930
----------- ----------- -----------
Total interest expense 9,409 8,631 7,505
Net interest income 20,381 14,933 10,754
Provision for loan losses 1,400 1,699 1,052
----------- ----------- -----------
Net interest income after provision for loan losses 18,981 13,234 9,702
----------- ----------- -----------
Non-interest income
Service charges on deposit accounts 569 459 357
Fees for other services to customers 30 29 29
Gain on the sale of loans 674 2,130 1,082
Gain on the sale of investment securities - 89 138
Loss on the sale of real estate owned (28) - -
Other income 87 122 68
----------- ----------- -----------
Total non-interest income 1,332 2,829 1,674
Non-interest expenses
Salaries and employee benefits 7,722 6,231 4,295
Commissions on the origination of loans 267 912 424
Occupancy and equipment expense 1,582 1,377 997
Intangibles amortization 27 - -
Advertising and marketing 336 279 202
Stationery and supplies 310 317 218
Professional services 436 338 269
Data processing 332 280 243
Other operating expenses 955 1,001 724
----------- ----------- -----------
Total non-interest expenses 11,967 10,735 7,372
----------- ----------- -----------
Income before federal income tax provision 8,346 5,328 4,004
Income tax provision 2,837 1,807 1,357
----------- ----------- -----------
Net income $ 5,509 $ 3,521 $ 2,647
=========== =========== ===========
Per share data:
Net income - basic $ 1.40 $ 1.10 $ 0.84
Net income - diluted $ 1.28 $ 1.01 $ 0.80
Weighted average number of shares outstanding - basic 3,922,423 3,215,181 3,160,510
Weighted average number of shares outstanding - diluted 4,292,319 3,493,853 3,322,511
The accompanying notes are an integral part of these consolidated statements.
12
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2004, 2003 and 2002
Accumulated
Other Total
Common Retained Comprehensive Stockholders'
(In thousands, except shares) Stock Earnings Income (loss) Equity
-------- -------- -------------- -------------
Balance, January 1, 2002 $ 27,675 $ 168 $ 60 $ 27,903
Exercise of stock options 121 - - 121
Stock dividend #1 961 (961) - -
Stock dividend #2 1,854 (1,854) - -
Net income - 2,647 - 2,647
Other comprehensive income
Changes in net unrealized gain
on securities held for sale - - 169 169
Reclassification adjustment for
losses included in net income - - (138) (138)
-------------- -------------
Net change in net unrealized loss
on securities available for sale - - 30 30
Tax effects - - (10) (10)
-------------- -------------
Other comprehensive income - - 20 20
-------------
Total comprehensive income 2,667
-------- -------- -------------- -------------
Balance, December 31, 2002 30,611 - 80 30,691
Exercise of stock options 447 - - 447
Stock dividend #1 1,312 (1,312) - -
Stock dividend #2 2,081 (2,081) - -
Net income - 3,521 - 3,521
Other comprehensive income
Changes in net unrealized gain
on securities held for sale - - 1 1
Reclassification adjustment for
gains included in net income - - (89) (89)
-------------- -------------
Net change in net unrealized loss
on securities available for sale - - (88) (88)
Tax effects 30 30
-------------- -------------
Other comprehensive loss - - (58) (58)
-------------
Total comprehensive income 3,463
-------- -------- -------------- -------------
Balance, December 31, 2003 $ 34,451 $ 128 $ 22 $ 34,601
======== ======== ============== =============
13
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2004, 2003 and 2002
Accumulated
Other Total
Common Retained Comprehensive Stockholders'
Stock Earnings Income (loss) Equity
-------- -------- ------------- -------------
Balance, January 1, 2004 $ 34,451 $ 128 $ 22 $ 34,601
Issuance of common stock 34,040 34,040
Exercise of stock options 616 - - 616
Tax effect of issuance of
stock options 518 518
Stock dividend #1 2,504 (2,504) - -
Stock dividend #2 2,789 (2,789) - -
Net income - 5,509 - 5,509
Other comprehensive income
Net change in net unrealized loss
on securities available for sale - - (1,030) (1,030)
Tax effects 350 350
------------- -------------
Other comprehensive loss - - (680) (680)
-------------
Total comprehensive income 4,829
-------- -------- ------------- -------------
Balance, December 31, 2004 $ 74,918 $ 344 ($ 658) $ 74,604
======== ======== ============= =============
The accompanying notes are an integral part of these consolidated statements.
14
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------
(In thousands) 2004 2003 2002
--------- --------- ---------
Cash flows from operating activities
Interest and fees received $ 29,101 $ 22,243 $ 18,084
Interest paid (8,604) (8,486) (7,700)
Proceeds from sale of mortgages held for sale 42,320 139,721 76,632
Origination of mortgages held for sale (41,974) (129,244) (82,487)
Taxes paid (2,435) (2,560) (1,645)
Loss on sale of real estate owned (28) - -
Cash paid to suppliers and employees (10,958) (8,654) (6,439)
--------- --------- ---------
Net cash provided by operating activities 7,422 13,020 (3,555)
Cash flows from investing activities
Proceeds from the sale of securities available for sale - 6,199 12,044
Proceeds from calls, maturities and repayments of
securities, available for sale 40,886 20,636 24,848
Purchases of securities available for sale (45,991) (21,622) (37,430)
Purchase of Federal Home Loan Bank stock (49) (40) (33)
Increase in loans, net of payments received (119,769) (133,696) (86,729)
Purchases of property and equipment (7,513) (757) (955)
Net cash paid in Bank of Washtenaw acquisition (5,010) - -
--------- --------- ---------
Net cash used in investing activities (137,446) (129,280) (88,255)
Cash flows from financing activities
Net increase (decrease) in non-interest bearing deposits (3,649) 6,625 11,016
Net increase in interest bearing deposits 98,637 110,908 73,589
Increase in other borrowings 125 - -
Repayments of Federal Home Loan Bank advances (24) (22) -
Proceeds from the issuance of subordinated debentures - - 10,000
Issuance of common stock 34,040 - -
Exercise of stock options 616 447 121
--------- --------- ---------
Net cash provided by financing activities 129,745 117,958 94,726
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (279) 1,698 3,576
Cash and cash equivalents at the beginning of the period 21,148 19,450 15,874
--------- --------- ---------
Cash and cash equivalents at the end of the period $ 20,869 $ 21,148 $ 19,450
========= ========= =========
15
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31,
--------------------------------
(In thousands) 2004 2003 2002
-------- -------- --------
Reconciliation of net income to net cash provided by operating activities
Net income $ 5,509 $ 3,521 $ 2,647
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for possible credit losses 1,400 1,699 1,052
Depreciation and amortization expense 556 478 425
Accretion of discount on investment securities (71) (13) (10)
Amortization of premium on investment securities 19 69 152
Amortization of intangible assets (27) - -
Gain on the sale of investment securities - (89) (138)
(Increase) decrease in mortgages held for sale (187) 8,347 (6,937)
Increase in interest receivable (182) (201) (175)
Increase (decrease) in interest payable 209 145 (195)
Increase in other assets (829) (345) (753)
Increase (decrease) in other liabilities 1,025 (591) 377
-------- -------- ---------
Net cash provided by operating activities $ 7,422 $ 13,020 ($ 3,555)
======== ======== =========
Noncash investing activities:
Bank of Washtenaw acquisition:
Loans acquired $ 66,665
Bank premises and equipment 613
Acquisition intangibles recorded 8,009
Other assets acquired 502
Deposits assumed (66,273)
Borrowing assumed (3,990)
Other liabilities assumed (516)
--------
$ 5,010
========
The accompanying notes are an integral part of these consolidated statements.
16
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements
follows.
Basis of Presentation and Operations
Dearborn Bancorp, Inc. (the "Corporation") was incorporated in Michigan on
September 30, 1992. The Corporation's primary subsidiary, Community Bank
of Dearborn (the "Bank"), began operations on February 28, 1994. The Bank
operates twelve community banking offices in Dearborn (2), Dearborn
Heights, Plymouth Township, Canton Township, Clinton Township (2),
Southgate, Auburn Hills, Saline and Ann Arbor (2) in Michigan, offering a
full range of banking services to individuals and businesses. The Bank
also operates Community Bank Mortgage, Inc., a mortgage company that
originates and services residential and commercial mortgage loans,
Community Bank Insurance Agency, an insurance agency with limited
activities and Community Bank Audit Services, Inc., a company that offers
internal auditing services to financial institutions.
The Bank's primary deposit products are checking, savings, and term
certificate accounts, and its primary lending products are commercial,
residential mortgage, and installment loans. Substantially all loans are
secured by specific items of collateral including business assets,
consumer assets and real estate. Commercial loans are expected to be
repaid from cash flow from operations of businesses. Real estate loans are
secured by both residential and commercial real estate. Other financial
instruments which potentially represent concentrations of credit risk
include deposit accounts in other financial institutions.
While the Corporation's management monitors the revenue streams of the
various products and services, operations are managed and financial
performance is evaluated on a Corporation-wide basis. Accordingly, all of
the Corporation's banking operations are considered by management to be
aggregated in one reportable operating segment.
Principles of Consolidation
The consolidated financial statements include the accounts of Dearborn
Bancorp, Inc. and its wholly-owned subsidiary, Community Bank of Dearborn
and its wholly-owned subsidiaries, Community Bank Mortgage, Inc.,
Community Bank Insurance Agency, Inc. and Community Bank Audit Services,
Inc. All significant intercompany transactions are eliminated in
consolidation.
Use of Estimates
In the preparation of financial statements, management is required to make
estimates and assumptions that affect reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Estimates that are more susceptible to change in the near term include the
allowance for loan losses, fair value of certain financial instruments,
and the carrying value of intangible assets.
Cash Flows
For purposes of the consolidated statements of cash flows, the Corporation
considers cash on hand, cash due from banks, federal funds sold, and
interest bearing deposits with other banks to be cash equivalents. Net
cash flows are reported for loan, deposit and short-term borrowing
transactions.
17
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or market on
an aggregate basis.
Securities
When securities are purchased and the Corporation intends to hold the
securities for an indefinite period of time but not necessarily to
maturity, they are classified as available for sale and carried at fair
value. Any decision to sell a security available for sale would be based
on various factors, including significant movements in interest rates,
changes in the maturity mix of the Corporation's assets and liabilities,
liquidity demands, regulatory capital considerations, and other similar
factors. Cost is adjusted for amortization of premiums and accretion of
discounts to maturity. Unrealized gains and losses on available for sale
securities are excluded from income and recorded as an amount, net of tax,
in other comprehensive income and as a separate component of stockholders'
equity until realized. All of the Corporation's securities are classified
as available for sale. Gains and losses on sales are based on the
amortized cost of the security and securities are written down to fair
market value when a decline in fair value is not temporary.
Declines in the fair value of securities below their cost that are other
than temporary are reflected as realized losses. In estimating
other-than-temporary losses, management considers: (1) the length of time
and extent that fair value has been less than cost, (2) the financial
condition and near term prospects of the issuer, and (3) the Corporation's
ability and intent to hold the security for a period sufficient to allow
for any anticipated recovery in fair value.
Loans
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the
principal balance outstanding, net of unearned interest, deferred loan
fees and costs, and an allowance for loan losses.
Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term.
Interest income on mortgage and commercial loans is generally discontinued
at the time the loan is 90 days delinquent unless the credit is
well-secured and in process of collection. Consumer loans are typically
charged off no later than 180 days past due. In all cases, loans are
placed on non-accrual or charged-off at an earlier date if collection of
principal or interest is considered doubtful.
All interest accrued but not received for loans placed on non-accrual is
reversed against interest income. Interest received on such loans is
accounted for on the cash-basis or cost-recovery method, until qualifying
for return to accrual. Loans are returned to accrual status when all the
principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
18
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable
incurred credit losses, increased by the provision for loan losses and
decreased by charge-offs less recoveries. Management estimates the
allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations
and estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in management's judgment,
should be charged off. Loan losses are charged against the allowance when
management believes the uncollectability of the loan balance is confirmed
or when required by policy.
Loan Impairment
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage and consumer loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of
the allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows using the loan's existing
rate or at the fair value of collateral if repayment is expected solely
from the collateral. Large groups of smaller balance homogeneous loans,
such as consumer and residential real estate loans, are collectively
evaluated for impairment, and accordingly, they are not separately
identified for impairment disclosures.
Foreclosed Assets
Assets acquired through or instead of loan foreclosure are initially
recorded at the lower of cost or fair value when acquired, establishing a
new cost basis. If fair value declines below the new cost basis, a
valuation allowance is recorded through expense. Costs after acquisition
are expensed.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets as follows:
Building and improvements - 5 to 30 years
Furniture and equipment - 3 to 10 years
Long-Term Assets
Premises and equipment and other long-term assets are reviewed for
impairment when events indicate their carrying amount may not be
recoverable from future undiscounted cash flows. If impaired, the assets
are recorded at fair value.
19
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill and Other Intangible Assets
Goodwill results from business acquisitions and represents the excess of
the purchase price over the fair value of acquired tangible assets and
liabilities and identifiable intangible assets. Goodwill is assessed at
least annually for impairment and any such impairment will be recognized
in the period identified.
Other intangible assets consist of core deposit intangible assets arising
from a bank acquisition in 2004. It is initially measured at fair value
and is being amortized on an accelerated method over the estimated useful
life.
Stock Compensation
Employee compensation expense under stock option plans is reported using
the intrinsic value method. No stock-based compensation cost is reflected
in net income, as all options granted had an exercise plan equal to or
greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and
earnings per share if expense was measured using the fair value
recognition provisions of FASB Statement No. 123, Accounting for
Stock-based Compensation (in thousands, except per share data).
2004 2003 2002
--------- --------- ---------
Net Income
As reported $ 5,509 $ 3,521 $ 2,647
Less: stock-based compensation expense
determined under fair value based method (9) (792) (651)
--------- --------- ---------
Pro forma $ 5,500 $ 2,729 $ 1,996
========= ========= =========
Basic income per share
As reported $ 1.40 $ 1.10 $ 0.84
Pro forma $ 1.40 $ 0.85 $ 0.63
Diluted income per share
As reported $ 1.28 $ 1.01 $ 0.80
Pro forma $ 1.28 $ 0.78 $ 0.60
The pro forma effects are computed with option pricing models, using the
following weighted average assumptions as of grant date. No options were
granted during 2004. All per share amounts have been adjusted for stock
dividends.
2003 2002
------- -------
Risk-free interest rate 3.55% 4.57%
Expected option life 7 years 8 years
Dividend yield 0.00% 0.00%
Expected volatility of stock price 25.55% 26.01%
20
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Corporation files a consolidated federal income tax return. The
Corporation uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are the expected future tax
amounts for the temporary differences between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes. A
valuation allowance, if needed, reduces deferred tax amounts to the amount
expected to be realized.
Stock Dividends
The fair value of shares issued in stock dividends is transferred from
retained earnings to common stock, to the extent of available retained
earnings. Any excess of fair value over available retained earnings is
considered a return of capital. All share and per share amounts are
retroactively adjusted for stock dividends.
Reclassifications
Some items in the prior year financial statements were reclassified to
conform to the current presentation.
Income Per Share
Basic income per share is net income divided by the weighted average
number of common shares outstanding during the period. Diluted income per
share includes the dilutive effect of additional potential common shares
issuable under stock options. Income per share is restated for all stock
splits and dividends through the date of issue of the financial
statements.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive
income. Other comprehensive income includes unrealized gains and losses on
securities available for sale, net of tax, which are also recognized as
separate components of equity.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be
reasonably estimated. Management does not believe there now are such
matters that will have a material effect on the financial statements.
Restrictions on Cash
The Corporation was required to have $5,166,000 and $2,772,000 of cash on
hand or on deposit with the Federal Reserve Bank to meet regulatory
reserve and clearing requirements at year end 2004 and 2003. These
balances do not earn interest.
21
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Dividend Restrictions
Banking regulations require maintaining certain capital levels and may
limit the dividends paid by the Bank to the Corporation or by the
Corporation to stockholders.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed in a separate
note. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments,
and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Adoption of New Accounting Standards
During 2004, the Company adopted FASB Statement 151, Inventory Costs - an
amendment of ARB No. 43, Chapter 4, FASB Statement 152, Accounting for
Real Estate Time-Sharing Transactions - an amendment of FASB Statements
No. 66 and 67, FASB Statement 153, Exchanges of Non-Monetary Assets - an
amendment of APB Opinion No. 29. Adoption of the new standards did not
materially affect the Company's operating results or financial condition.
These accounting standards are not expected to materially affect the
Corporation's operating results or financial condition in 2005.
22
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE B - SECURITIES AVAILABLE FOR SALE
The amortized cost and fair value for securities available for sale and
the unrealized gains and losses recognized in accumulated other
comprehensive income were as follows (in thousands):
December 31, 2004
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
US Treasury securities $ 15,696 $ - ($ 62) $15,634
Mortgage backed securities 826 25 - 851
Corporate debt securities 1,550 - - 1,550
FHLMC preferred stock 4,000 - (960) 3,040
--------- ---------- ---------- -------
Totals $ 22,072 $ 25 ($ 1,022) $21,075
========= ========== ========== =======
December 31, 2003
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
US Treasury securities $ 2,011 $ 2 $ - $ 2,013
Mortgage backed securities 1,194 31 - 1,225
Corporate debt securities 9,710 - - 9,710
FHLMC preferred stock 4,000 - - 4,000
--------- ---------- ---------- -------
Totals $ 16,915 $ 33 $ - $16,948
========= ========== ========== =======
The amortized cost and fair value of securities available for sale at
December 31, 2004 by contractual maturity are shown below (in thousands).
Securities not due at a single maturity date, such as mortgage backed
securities and Federal Home Loan Mortgage Corporation preferred stock are
shown separately.
Amortized Fair
Cost Value
---------- -------
Due in three months or less $ 1,997 $ 1,996
Due in three months through one year 5,991 5,970
Due in one year through five years 7,708 7,668
Due in greater than five years 1,550 1,550
Mortgage backed securities 826 851
FHLMC preferred stock 4,000 3,040
---------- -------
Totals $ 22,072 $21,075
========== =======
23
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE B - SECURITIES AVAILABLE FOR SALE (Continued)
Sales of available for sale securities for the years ended December 31,
are as follows (in thousands):
2004 2003 2002
---- ------ -------
Proceeds $ - $6,199 $12,044
Gross gains - 89 138
Gross losses - - -
Securities having a carrying value of $5,859,000 and $1,225,000 at
December 31, 2004 and 2003, respectively, were pledged to secure Federal
Home Loan Bank of Indianapolis advances and securities sold under
agreements to repurchase.
Securities with unrealized losses at year-end 2004, aggregated by
investment category and length of time that individual securities have
been in a continuous unrealized loss position, are as follows:
Fair Value Unrealized Loss
---------- ---------------
US treasury securities $ 15,640 ($ 62)
FHLMC preferred Stock 3,040 (960)
---------- -----------
Total temporarily impaired $ 18,680 ($ 1,022)
========== ===========
These securities have been in a continuous loss position for less than 12
months.
Unrealized losses on US treasury securities have not been recognized into
income because these securities are of high credit quality, management has
the intent and ability to hold these securities for the foreseeable
future, and the decline in fair value is largely due to changes in
interest rates. The fair value is expected to recover as the bonds
approach their maturity date or reset date.
Unrealized losses on FHLMC preferred stock has not been recognized into
income because the issuer of this security is of high credit quality,
management has the intent and ability to hold this security for the
foreseeable future, and the decline in fair value is believed largely due
to changes in interest rates and reported business issues not related to
the underlying operations of the organization. Management believes that
the fair value will recover as the security's interest rate increases and
the reported business issues are fully resolved.
24
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE C - LOANS, NET
Major categories of loans included in the portfolio at December 31 are as
follows (in thousands):
Percent
2004 2003 Incr(decr)
--------- --------- ----------
Consumer loans $ 42,149 $ 25,200 67.26%
Commercial, financial, & other 129,103 68,922 87.32%
Commercial real estate construction 72,286 50,087 44.32%
Commercial real estate mortgages 296,934 208,305 42.55%
Residential real estate mortgages 47,090 48,444 (2.79%)
--------- --------- -----
587,562 400,958 46.54%
Allowance for loan losses (5,884) (4,314)
--------- ---------
$ 581,678 $ 396,644
========= =========
Certain directors and executive officers of the Corporation, including
their related interests, were loan customers of the Bank during 2004 and
2003. These loan transactions for the years ended December 31, are as
follows (in thousands):
2004 2003
--------- ---------
Balance, beginning of year $ 3,691 $ 2,751
New loans during period 1,080 2,278
Repayments made during period (621) (1,338)
--------- ---------
Balance, end of period $ 4,150 $ 3,691
========= =========
25
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE C - LOANS, NET (Continued)
Activity in the allowance for loan losses for the years ended December 31
are as follows (in thousands):
2004 2003 2002
------ ------ ------
Balance, beginning of year $4,314 $2,875 $1,922
Allowance on loans acquired 184 - -
Charge-offs:
Consumer loans 31 38 32
Commercial, financial & other - 141 141
Commercial real estate construction - 50 -
Commercial real estate mortgages 100 124 -
Recoveries:
Consumer loans 13 13 9
Commercial, financial & other 104 30 65
Commercial real estate construction - 50 -
Commercial real estate mortgages - - -
------ ------ ------
Net charge-offs 14 260 99
Additions charged to operations 1,400 1,699 1,052
------ ------ ------
Balance at end of period $5,884 $4,314 $2,875
====== ====== ======
26
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
The aggregate balances in impaired loans at December 31, are as follows
(in thousands):
2004 2003
------ -------
Impaired loans with no allocated allowance for loan losses $ - $ -
Impaired loans with allocated allowance for loan losses 1,965 1,600
------ -------
Total $1,965 $ 1,600
====== =======
Amount of the allowance for loan loss allocated $ 295 $ 240
Average of impaired loans during the year $1,412 $ 1,767
Interest income recognized during impairment $ 10 $ 5
Cash-basis interest income recognized 10 5
Non performing loans were as follows (in thousands):
2004 2003 2002
------ ------- ------
Troubled debt restructuring $ - $ - $ -
Over 90 days past due, still on accrual 143 19 86
Non-accrual loans 2,956 2,056 2,641
Real estate owned 136 - -
Other repossessed assets 2 - -
------ ------- ------
Total nonperforming assets $3,237 $ 2,075 $2,727
====== ======= ======
Non performing loans and impaired loans are defined differently. Nonperforming
loans includes both smaller balance homogeneous loans that are collectively
evaluated for impairment and individually classified impaired loans.
27
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment are comprised of the following at December 31 (in
thousands):
2004 2003
------- ------
Land and improvements $ 1,641 $1,150
Building and improvements 11,220 4,060
Furniture and equipment 4,362 2,860
------- ------
17,223 8,070
Less accumulated depreciation 4,099 2,516
------- ------
$13,124 $5,554
======= ======
Depreciation expense for 2004, 2003 and 2002 amounted to $556,000,
$478,000, and $425,000, respectively. During 2004, the Corporation made
expenditures of $7,513,000. The expenditures were primarily due to the
purchase and renovation of an Operations Center in Allen Park, Michigan
and an Administration Building in Dearborn, Michigan. The Operations
Center houses the Bank's accounting, product/support, compliance and data
operations departments and two of the Corporation's subsidiaries,
Community Bank Audit Services, Inc. and Community Bank Mortgage, Inc. The
Administrative Building houses the Bank's executive, administrative, human
resources and commercial lending departments.
Rent expense for facilities of $678,000, $445,000 and $245,000 was
incurred during 2004, 2003 and 2002, respectively. Rental commitments
under noncancellable operating leases are as follows, before considering
renewal options that generally are present (in thousands):
2005 $ 574
2006 574
2007 443
2008 401
2009 398
Thereafter 605
-------
$ 2,995
=======
28
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE E - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill acquired during 2004 was as follows:
2004
--------
Balance, beginning of year $ -
Acquired goodwill 7,080
Impairment -
--------
Balance at end of year $ 7,080
========
Other intangible assets were as follows:
2004
----------------------
Gross
Carrying Accumulated
Amount Amortization
-------- ------------
Amortized intangible assets
Core deposit intangibles $ 929 $ 27
-------- ------------
Total $ 929 $ 27
======== ============
Estimated amortization expense for each of the next five years is as
follows:
2005 $ 153
2006 121
2007 97
2008 78
2009 78
29
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE F - DEPOSITS
Time deposits of $100,000 or more were $199,237,000 and $113,755,000 at
December 31, 2004 and 2003, respectively. Time deposits of $100,000 or
more from governmental units, which are included in total time deposits of
$100,000 or more were $71,058,000 and $46,573,000 at December 31, 2004 and
2003, respectively.
Scheduled maturities of time deposits at December 31, 2004 were as follows
(in thousands):
$100,000 and over Less than $100,000 Total
----------------- ------------------ ---------
2005 $135,444 $ 73,937 $ 209,381
2006 44,818 39,184 84,002
2007 9,571 6,860 16,431
2008 5,249 2,575 7,824
2009 4,155 1,892 6,047
-------- -------- ---------
Totals $199,237 $124,448 $ 323,685
======== ======== =========
Related party deposits from directors and executive officers of the
Corporation were approximately $6,546,000 and $3,731,000 at December 31,
2004 and 2003, respectively.
NOTE G - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are secured by US
government agency securities with a carrying amount of $5.0 million at
year-end 2004. There were no securities sold under agreement to repurchase
during 2003.
Securities sold under agreements to repurchase are financing arrangements
that mature within two years. At maturity, the securities underlying the
agreements are returned to the Corporation. Information concerning
securities sold under agreements to repurchase is summarized as follows
(in thousands):
2004
--------
Average daily balance during the year $ 739
Average interest rate during the year 1.25%
Maximum month-end balance during year $ 4,115
Weighted average interest rate at year-end 1.25%
30
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE H - FEDERAL HOME LOAN BANK ADVANCES
The Bank has entered into an Advances, Pledge and Security Agreement with
the Federal Home Loan Bank of Indianapolis. Advances were $20,614,000 and
$20,638,000 at December 31, 2004 and 2003, respectively. These advances
carry a fixed rate of interest and are secured by a blanket collateral
agreement with the Federal Home Loan Bank of Indianapolis covering
eligible mortgage loans in the amount of $46,860,000 and securities
available for sale in the amount of $775,000. Federal Home Loan Bank
advances are comprised of the following at December 31, 2004 (in
thousands):
Weighted
Date Amount Average Rate Maturity Date
- ---- ------ ------------ -------------
2001 10,000 4.28% 2006
2001 5,000 4.54% 2007
2001 5,000 4.68% 2008
2002 614 4.01% 2007
------
20,614 4.43%
======
The Bank makes monthly interest payments with principal generally due at
maturity. Required principal payments at year-end 2004 are $10.0 million
in 2006, $5.6 million in 2007 and $5.0 million in 2008. Prepayment
penalties apply if advances are repaid prior to maturity. The Bank's
capacity to borrow from the Federal Home Loan Bank is capped at $60
million by a resolution of the Board of Directors of the Bank. The Bank
had the ability to borrow up to $33.1 million based on collateral pledged
by the Bank at December 31, 2004.
NOTE I - SUBORDINATED DEBENTURES
In 2002, the Corporation issued $10,000,000 of floating rate obligated
mandatory redeemable securities through Dearborn Bancorp Trust I, a
special purpose entity as part of a pooled offering on December 19, 2002.
The interest rate is the three month LIBOR plus 3.35% and was 5.42% at
December 31, 2004. The securities have a term of thirty years with
interest payments due on a quarterly basis. The Corporation may redeem the
securities after December 19, 2007, with regulatory approval, at face
value.
31
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE J - INCOME TAXES
The federal tax provision consists of the following (in thousands):
2004 2003 2002
------- ------ ------
Current $ 3,301 $2,216 $1,718
Deferred (464) (409) (361)
------- ------ ------
$ 2,837 $1,807 $1,357
======= ====== ======
The details of the net deferred tax asset are as follows at December 31, (in
thousands):
2004 2003
------ -------
Deferred tax assets
Provision for possible credit losses $1,829 $ 1,346
Deferred loan fees and costs $ 247 -
Unrealized losses on securities, available for sale 339 -
Other 116 143
------ -------
Total deferred tax assets 2,531 1,489
Deferred tax liabilities
Deferred loan fees and costs - (121)
Premises and equipment (305) (76)
Unrealized gains on securities available for sale - (11)
Goodwill and other intangibles (36) -
Other (96) (2)
------ -------
Total deferred tax liabilities (437) (210)
------ -------
Net deferred tax asset $2,094 $ 1,279
====== =======
The effective federal tax rate is substantially the same as the statutory
rate of 34%. The goodwill and other intangible assets acquired during 2004
are being amortized over 15 years and are tax deductible, but the goodwill
is not being amortized for book purposes.
32
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE K - FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET RISK
Fair Value of Financial Instruments
The estimated fair value of the Corporation's financial instruments at
December 31, are as follows (in thousands):
2004 2003
----------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
Assets:
Cash and cash equivalents $ 20,869 $ 20,869 $ 21,148 $ 21,148
Loans held for sale 1,692 1,724 1,505 1,535
Securities 21,075 21,075 16,948 16,948
Federal Home Loan Bank Stock 1,122 1,122 1,073 1,073
Loans 581,678 583,242 396,644 401,218
Accrued interest receivable 1,889 1,889 1,461 1,461
Liabilities:
Deposits $540,880 $ 542,401 $379,619 $ 380,940
Securities sold under agreements to repurchase 4,115 4,115 - -
Federal Home Loan Bank advances 20,614 20,991 20,638 21,427
Subordinated debentures 10,000 10,000 10,000 10,000
Accrued interest payable 1,107 1,107 754 754
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosure for financial instruments:
Carrying amount is the estimated fair value for cash and cash equivalents,
Federal Home Loan Bank stock, accrued interest receivable and payable,
demand deposits, short-term debt, and variable rate loans or deposits that
reprice frequently or fully. Security fair values are based on market
prices or dealer quotes, and if no such information is available, on the
rate and term of the security and information about the issuer. For fixed
rate loans or deposits and for variable rate loans or deposits with
infrequent repricing or repricing limits, fair value is based on
discounted cash flows using current market rates applied to the estimated
life and credit risk. Fair values for impaired loans are estimated using
discounted cash flow analysis or underlying collateral values. Fair value
of loans held for sale is based on market quotes. Fair value of debt is
based on current rates for similar financing. The fair value of
off-balance-sheet items is based on the current fees or cost that would be
charged to enter into or terminate such arrangements, and was not
considered material to this presentation.
33
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE K - FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET RISK (Continued)
Off-Balance-Sheet Risk
The Corporation is party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments include commitments to extend credit
and financial guarantees. These instruments involve, to varying degrees,
elements of credit and interest rate risk that are not recognized in the
consolidated financial statements.
Exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and financial
guarantees written is represented by the contractual notional amount of
those items. The Corporation generally requires collateral to support such
financial instruments in excess of the contractual notional amount of
those instruments and, therefore, is in a fully collateralized position.
The Corporation had outstanding loan commitments aggregating $115,504,000
and $76,300,000 at December 31, 2004 and 2003, respectively. Loan
commitments for variable rate loans were $113,324,000 and $70,411,000 at
December 31, 2004 and 2003, respectively. Loan commitments for fixed rate
loans were $2,180,000 and $5,889,000 at December 31, 2004 and 2003,
respectively. The fixed rate loan commitments at December 31, 2004 have
interest rates ranging from 4.47% to 12.50% and maturities ranging from
one year to ten years. A distribution of outstanding loan commitments by
contractual maturity is shown below (in thousands):
At December 31, 2004
Committment Period
--------------------------------------------------------------------
Less than One to three Four to five Over
one year years years five years Totals
--------- ------------ ------------ ---------- --------
Home equity lines of credit $ 100 $ 196 $ 332 $ 21,235 $ 21,863
Residential loan committments 2,271 - - - 2,271
Standby letters of credit 2,574 3,000 - - 5,574
Commercial lines of credit 35,662 1,407 3,384 268 40,721
Other commercial committments 29,037 11,885 299 3,854 45,075
--------- ------------ ------------ ---------- --------
Totals $ 69,644 $ 16,488 $ 4,015 $ 25,357 $115,504
========= ============ ============ ========== ========
At December 31, 2003
Committment Period
--------------------------------------------------------------------
Less than One to three Four to five Over
one year years years five years Totals
--------- ------------ ------------ ---------- --------
Home equity lines of credit $ 20 $ 105 $ 251 $ 12,993 $ 13,369
Residential loan committments 1,602 - - - 1,602
Standby letters of credit 776 - 3,000 - 3,776
Commercial lines of credit 24,445 555 352 3 25,355
Other commercial committments 20,269 9,395 235 2,299 32,198
--------- ------------ ------------ ---------- --------
Totals $ 47,112 $ 10,055 $ 3,838 $ 15,295 $ 76,300
========= ============ ============ ========== ========
34
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE K - FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET RISK (Continued)
Commitments to extend credit are agreements to lend to a customer as long
as there are no violations of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require a payment of a fee. Since portions of the
commitments are expected to expire without being drawn upon, the total
commitments do not necessarily represent future cash requirements. The
Corporation evaluates each customer's credit worthiness on a case by case
basis. The amount of collateral obtained upon extension of credit is based
on management's credit evaluation of the customer.
NOTE L - EMPLOYEE BENEFIT PLANS
The Bank maintains a 401(k) plan for its employees. All employees are
eligible to participate in the 401(k) after completion of age and service
requirements. An employee can be enrolled as a participant on the first
"Enrollment Date" after reaching age 21 and completing six months of
service.
Contributions to the plan by the Bank are discretionary and are expensed
as made. The Bank matches 50% of the first 6% of employee contributions to
the plan. Employer contributions vest 20% per year for five years. During
2004, 2003 and 2002, employer contributions were $121,000, $124,000 and
$62,000, respectively.
NOTE M - REGULATORY MATTERS
The Corporation and Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the financial statements. Under capital
adequacy guidelines and, additionally for the Bank, the regulatory
framework for prompt corrective action, the Corporation and Bank must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. At December 31, 2004 and 2003, the most
recent regulatory notifications categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes have
changed the institution's category. The capital amounts and
classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and Bank to maintain minimum amounts and ratios
(set forth in the following table) of total and Tier 1 capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier 1
capital (as defined) to average assets (as defined).
35
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE M - REGULATORY MATTERS (Continued)
The following is a presentation of the Corporation's and Bank's regulatory
capital ratios (in thousands):
Minimum Minimum
for Capital To Be Well Capitalized
Actual Adequacy Purposes Action Regulations
------------------ ----------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
As of December 31, 2004
Total capital
(to risk weighted assets)
Consolidated $81,868 13.27% $49,360 8.00% $61,700 10.00%
Bank 63,986 10.47% 48,913 8.00% 61,141 10.00%
Tier 1 capital
(to risk weighted assets)
Consolidated 75,984 12.32% 24,680 4.00% 37,020 6.00%
Bank 58,102 9.50% 24,457 4.00% 36,685 6.00%
Tier 1 capital
(to average assets)
Consolidated 75,984 12.12% 25,079 4.00% 31,348 5.00%
Bank 58,102 9.78% 23,765 4.00% 29,706 5.00%
As of December 31, 2003
Total capital
(to risk weighted assets)
Consolidated $48,893 11.80% $33,237 8.00% $41,547 10.00%
Bank 42,763 10.50% 32,701 8.00% 40,877 10.00%
Tier 1 capital
(to risk weighted assets)
Consolidated 44,579 10.70% 16,639 4.00% 24,928 6.00%
Bank 38,449 9.40% 16,351 4.00% 24,526 6.00%
Tier 1 capital
(to average assets)
Consolidated 44,579 10.20% 17,460 4.00% 21,825 5.00%
Bank 38,449 9.00% 17,113 4.00% 21,391 5.00%
Federal and state banking laws and regulations place certain restrictions
on the amount of dividends and loans a bank can pay to its parent company.
Under the most restrictive of these regulations, the Bank could pay
approximately $15,400,000 in dividends to the parent company without prior
regulatory approval. No cash dividends have ever been paid by the Bank.
36
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE N - STOCK OPTION PLAN
Options to buy common stock have been granted to officers and employees
under an Incentive Stock Option Plan which provides for issue of up to
738,729 shares. Exercise price is the market price at date of grant. The
maximum option term is ten years, and options vest fully after six months
from the date of grant. If an option expires or terminates without having
been exercised, such option becomes available for future grant under the
Plan.
A summary of the option activity is as follows:
Weighted
Weighted Average Fair
Available Average Value of
for Options Exercise Options
Grant Outstanding Price Granted
--------- ----------- -------- ------------
Outstanding at January 1, 2002 310,962 398,222 $ 6.79
Granted (185,058) 185,058 8.19 4.09
Exercised - (22,127) 5.46
-------- ------- --------
Outstanding at December 31, 2002 125,904 561,153 7.37
Forfeited 4,862 (4,862) 15.14
Granted (130,766) 130,766 15.24 5.70
Exercised - (66,553) 6.71
-------- ------- --------
Outstanding at December 31, 2003 - 620,504 9.03
Forfeited - - -
Granted - - -
Exercised - (80,030) 8.00
-------- ------- --------
Outstanding at December 31, 2004 - 540,474 $ 9.18
======== ======= ========
Options outstanding at December 31, 2004 were as follows:
Outstanding Exercisable
---------------------------------- -----------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Number Life Price Number Price
- ------------------------ ------- ----------- -------- ------- --------
$4.61 - $ 9.71 391,415 5.3 years $ 7.18 391,415 $ 7.18
$10.38 - $17.80 149,059 8.0 years $ 14.43 149,059 $14.43
------- -------
Totals 540,474 6.1 years $ 9.18 540,474 $ 9.18
======= =======
At December 31, 2004, 2003 and 2002, 540,474, 615,643 and 529,549 options
were exercisable at weighted average exercise prices of $9.18, $8.96 and
$7.13 per share, respectively. On December 31, 2004, there were no shares
available for grant.
37
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE O - INCOME PER SHARE
The following is a reconciliation of the numerator and denominator of the
basic and diluted income per share calculation for the years ended
December 31, 2004, 2003 and 2002 (in thousands, except share and per share
data):
2004 2003 2002
---------- ---------- ----------
Basic
Net income $ 5,509 $ 3,521 $ 2,647
Weighted average common shares 3,922,423 3,215,181 3,160,510
Basic income per common share $ 1.40 $ 1.10 $ 0.84
Diluted
Net income $ 5,509 $ 3,521 $ 2,647
Weighted average common shares
outstanding for basic income per
common share 3,922,423 3,215,181 3,160,510
Add: Dilutive effects of assumed
exercise of stock options 369,896 278,672 162,001
Average shares and dilutive potential
common shares 4,292,319 3,493,853 3,322,511
Dilutive income per common share $ 1.28 $ 1.01 $ 0.80
Stock options of 0, 4,862 and 31,603 shares of common stock were not
considered in computing diluted earnings per common share for 2004, 2003
and 2002 because they were antidilutive. All share and per share amounts
have been adjusted for stock dividends.
38
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE P - PARENT ONLY CONDENSED FINANCIAL INFORMATION
The condensed financial information that follows presents the financial
condition of the parent company, Dearborn Bancorp, Inc., along with the
results of its operations and its cash flows.
CONDENSED BALANCE SHEETS
December 31,
--------------------
(In thousands) 2004 2003
-------- --------
ASSETS
Cash and cash equivalents $ 5,390 $ 712
Investment securities 10,980 4,500
Investment in subsidiary 66,080 38,471
Other assets 2,134 2,101
-------- --------
Total assets $ 84,584 $ 45,784
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Other liabilities $ (20) $ 1,183
Subordinated debentures 10,000 10,000
Stockholders' equity 74,604 34,601
-------- --------
Total liabilities and stockholder's equity $ 84,584 $ 45,784
======== ========
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
-------------------------------
(In thousands) 2004 2003 2002
-------- -------- --------
Interest income $ 260 $ 121 $ 113
Operating expenses 919 604 164
-------- -------- --------
Net loss before equity in undistributed
income of subsidiary (659) (483) (51)
Equity in undistributed income
of subsidiary 6,168 4,004 2,696
-------- -------- --------
Net income $ 5,509 $ 3,521 $ 2,645
======== ======== ========
39
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE P - PARENT ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(In thousands) 2004 2003 2002
-------- -------- --------
Cash flows from operating activities
Net income $ 5,509 $ 3,521 $ 2,647
Adjustments to reconcile net income
To net cash provided by operating activities
Equity in undistributed income of subsidiary (6,168) (4,004) (2,696)
Other, net 227 213 (150)
-------- -------- --------
Net cash flows provided by operating activities (432) (270) (199)
Cash flows from investing activities
Investment in subsidiary (22,101) (7,500) (6,000)
Purchases of securities, available for sale (29,595) (1,235) (6,380)
Maturity of securities, available for sale 23,150 4,115 5,354
Property and equipment acquired - - (56)
-------- -------- --------
Net cash flows used in investing activities (28,546) (4,620) (7,082)
Cash flows from financing activities
Proceeds from exercise of stock options 616 446 121
Issuance of common stock 34,040 - -
Proceeds from subordinated debentures - - 10,000
Increase (decrease) in note payable (1,000) 1,000 -
-------- -------- --------
Net cash flows used in financing activities 33,656 1,446 10,121
Increase (decrease) in cash and cash equivalents 4,678 (3,444) 2,840
Cash and cash equivalents at the beginning of year 712 4,156 1,316
-------- -------- --------
Cash and cash equivalents at end of year $ 5,390 $ 712 $ 4,156
======== ======== ========
NOTE Q - ISSUANCE OF COMMON STOCK
During 2004, the Corporation completed a public offering of 1,470,915 shares of
its common stock at $24.76 per share in a firm commitment underwritten offering.
The offering was priced on July 19, 2004 and closed on July 23, 2004. The number
and price of shares issued has been adjusted for stock dividends. The net
proceeds of the sale of common stock, after expenses of $2,383,000, were
$34,040,000.
40
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE R - ACQUISITION
On October 29, 2004, the Corporation acquired the Bank of Washtenaw
("Washtenaw"), a wholly owned subsidiary of Pavillion Bancorp, Inc. for
$15,100,000 in cash. The assets and liabilities of the Bank of Washtenaw at
acquisition and net income derived from those assets and liabilities since the
acquisition have been consolidated into the Bank. Washtenaw, which was founded
in January 2001, has its main office in Saline, Michigan with a branch office
and a regional lending center in Ann Arbor, Michigan. As of October 29, 2004,
Washtenaw had total assets of $85,500,000, gross loans of $67,100,000 and total
deposits of $66,100,000.
The acquisition has been accounted for using the purchase method of accounting,
and accordingly, the purchase price has been allocated to the tangible and
identified intangible assets purchased and the liabilities assumed based upon
the estimated fair values at the date of acquisition. There are refinements in
the process of allocating the purchase price that have not been entirely
completed. Identified intangible assets and purchase accounting fair value
adjustments are being amortized under various methods over the expected lives of
the corresponding assets and liabilities. Goodwill will not be amortized, but
will be reviewed for impairment on an annual basis. Goodwill and other
intangible assets are tax deductible over 15 years. Currently, identified
intangible assets subject to amortization are $929,000. Goodwill aggregates to
$7,080,000.
The following table presents pro forma information for the Corporation including
the acquisition of Bank of Washtenaw for the year ended December 31, 2004 and
2003, as if the acquisition had occurred at the beginning of 2004 and 2003.
Twelve Months Ended
(In thousands, except share and per share data) 12/31/04 12/31/03
-------- --------
Interest income $ 33,553 $ 27,884
Interest expense 10,691 10,255
-------- --------
Net interest income 22,862 17,629
Provision for loan loss 1,419 1,912
-------- --------
Net interest income after provision for loan losses 21,443 15,717
Non-interest income 1,575 3,230
Non-interest expense 13,741 13,248
-------- --------
Income before income tax provision 9,277 5,699
Income tax provision 3,261 2,061
-------- --------
Net income $ 6,017 $ 3,638
======== ========
Basic income per share $ 1.53 $ 1.13
Diluted income per share $ 1.40 $ 1.04
41
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2004, 2003 AND 2002
NOTE S - QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
Interest Net Interest Net Income per share
Income Income Income Basic Diluted
-------- ------------ ------ ------ -------
2004
First quarter $ 6,498 $ 4,484 $1,174 $ 0.36 $ 0.33
Second quarter 6,849 4,815 1,390 0.42 0.38
Third quarter (1) 7,426 5,003 1,402 0.32 0.30
Fourth quarter 9,017 6,079 1,543 0.32 0.30
2003
First quarter $ 5,317 $ 3,012 $ 580 $ 0.18 $ 0.17
Second quarter 5,732 3,489 759 0.24 0.22
Third quarter 6,116 4,145 1,010 0.31 0.29
Fourth quarter 6,399 4,287 1,172 0.36 0.33
(1) Decline in income per share results from issuance of common stock
during the third quarter.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Corporation was formed in 1992 and the Bank was formed in 1993.
Subsequently, the Bank has opened offices in several communities in Southeastern
Michigan. The Corporation acquired the Bank of Washtenaw on October 29, 2004.
The three branches, previously operated by the Bank of Washtenaw have been
consolidated into the operations of the Bank. The date opened, branch location
and branch type of each branch is listed below:
Date Opened Location Type of office
- ------------- --------------------------------- ------------------------------------
February 1994 22290 Michigan Avenue Full service retail branch with ATM
Dearborn, Michigan 48123
December 1995 24935 West Warren Avenue Full service retail branch
Dearborn Heights, Michigan 48127
August 1997 44623 Five Mile Road Full service retail branch with ATM
Plymouth, Michigan 48170
May 2001 1325 North Canton Center Road Full service retail branch with ATM
Canton, Michigan 48187
December 2001 45000 River Ridge Drive Regional lending center
Clinton Township, Michigan 48038
November 2002 19100 Hall Road Full service retail branch with ATM
Clinton Township, Michigan 48038
February 2003 12820 Fort Street Full service retail branch with ATM
Southgate, Michigan 48195
May 2003 3201 University Drive, Suite 180 Full service retail branch
Auburn Hills, Michigan 48326 Regional lending center
October 2004 450 East Michigan Avenue Full service retail branch with ATM
Saline, MI 48176
October 2004 250 West Eisenhower Parkway Full service retail branch with ATM
Ann Arbor, MI 48103 Regional lending center
October 2004 2180 West Stadium Blvd. Full service retail branch with ATM
Ann Arbor, MI 48103
December 2004 1360 Porter Street Loan production office
Dearborn, MI 48123 Regional lending center
The Bank has also formed three subsidiaries that offer additional or specialized
services to the Bank's customers. The Bank's subsidiaries, their formation date
and the type of services offered are listed below:
Date Formed Name Services Offered
- ------------- ------------------------------------ ------------------------------------
August 1997 Community Bank Insurance Agency, Inc. Limited insurance related activities
May 2001 Community Bank Mortgage, Inc. Origination of commercial and
residential mortgage loans
March 2002 Community Bank Audit Services, Inc. Internal auditing and compliance
services for financial institutions
43
FORWARD LOOKING STATEMENTS
The following discussion 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The "Management's Discussion and Analysis of Financial Condition and Results of
Operations", as well as disclosures found elsewhere in the annual report, are
based upon the consolidated financial statements of Dearborn Bancorp, Inc.,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires Dearborn Bancorp, Inc. to make estimates and judgements that
affect the reported amounts of assets, liabilities, revenues and expenses.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan loss. Actual
results could differ from those estimates.
The allowance for loan loss is maintained at a level believed adequate by
management to absorb probable losses inherent in the loan portfolio.
Management's evaluation of the adequacy of the allowance for loan loss is an
estimate based on reviews of individual loans, assessments of the impact of
current and anticipated economic conditions on the portfolio, and historical
loss experience. See Note C of the Notes to Consolidated Financial Statements
and the discussion of "Allowance for Loan Loss" in the Management's Discussion
and Analysis.
Management believes the accounting estimates related to the allowance for loan
loss is a "critical accounting estimate" because:
1) The estimates are highly susceptible to change from period to period
and require management to make judgements concerning the quality of
the loan portfolio and anticipated economic conditions.
2) The impact of recognizing an impairment or loan loss could have a
material effect on the financial statements of Dearborn Bancorp,
Inc.
3) The Bank's rapid growth and entry into new markets make estimating
the required analysis more complicated and result in past experience
not being as reliable an indicator of future experience as it might
be otherwise.
Management has discussed the development and selection of these critical
accounting estimates with the audit committee of the board of directors and the
audit committee has reviewed the Corporation's disclosures related to them in
this Management's Discussion and Analysis.
44
ACQUISITION
The Corporation acquired the Bank of Washtenaw on October 29, 2004 from
Pavillion Bancorp for $15.1 million. The Bank of Washtenaw was founded in
January 2001 and operated branch offices in Saline, Michigan and Ann Arbor,
Michigan (2). Since its inception, the Bank of Washtenaw has experienced strong
asset growth and improving profitability. The Bank of Washtenaw has been
consolidated into the Community Bank of Dearborn and operates as the Bank's
Washtenaw Region. Eighteen former Bank of Washtenaw employees have joined the
Bank to form the Bank's Washtenaw Region, which is directed by Walter G. Byers
as Washtenaw Regional President. Mr. Byers, who was formerly the President of
the Bank of Washtenaw, has over 20 years of community banking experience in
Washtenaw County. The Corporation expects the acquisition to contribute to the
Bank's growth and net income immediately.
RESULTS OF OPERATIONS
2004 Compared to 2003. The Corporation reported net income of $5,509,000 in 2004
compared to $3,521,000 in 2003, an increase of $1,988,000 or 56%. The
Corporation's increase in net income was primarily due to an increase in net
interest income, partially offset by a decrease in the gain on sale of loans and
increases in salaries and employee benefits.
2003 Compared to 2002. The Corporation reported net income of $3,521,000 in 2003
compared to $2,647,000 in 2002, an increase of $874,000 or 33%. The
Corporation's increase in net income was primarily due to an increase in net
interest income and gain on sale of loans, partially offset by increases in
salaries and employee benefits.
NET INTEREST INCOME
2004 Compared to 2003 Net interest income for the period ended December 31, 2004
was $20,381,000 compared to $14,933,000 for the period ended December 31, 2003,
an increase of $5,448,000 or 36%. The increase in net interest income was
primarily due to increases in the volume of interest earning assets and interest
bearing liabilities. The Corporation's net interest rate spread increased to
3.69% in 2004 from 3.63% in 2003, an increase of 6 basis points. The increase in
the net interest rate spread was primarily due to the volume of interest earning
assets and interest bearing liabilities. Additionally, the Bank has improved its
asset mix by deploying a larger proportionate share of its funds into loans. The
decrease in the cost of deposits was primarily due to the repricing of the
Bank's time deposits into other deposit products at a lower interest rate. The
Corporation's net interest margin increased to 4.04% in 2004 from 3.97% in 2003.
Average interest earning assets grew by $127.7 million between the periods while
interest bearing liabilities grew by $95.8 million. While management is
continually reviewing spreads and margins, future increases in the net interest
margin are primarily expected from volume growth in the higher yielding loan
portfolio and the diversification of the Bank's deposit structure. The primary
sources of funding for the expected growth in the loan portfolio will be excess
cash and cash equivalents, deposit growth, additional Federal Home Loan Bank
advances and the deployment of funds from the sale of securities available for
sale. During 2005, the Corporation is expecting the net interest rate spread to
continue to improve as a result of continuing to grow loan volume while
carefully managing growth in time deposits, statement savings, interest
checking, money market and business checking accounts.
2003 Compared to 2002 Net interest income for the period ended December 31, 2003
was $14,933,000 compared to $10,754,000 for the period ended December 31, 2002,
an increase of $4,179,000 or 39%. The increase in net interest income was
primarily due to increases in the volume of interest earning assets and interest
bearing liabilities. The Corporation's net interest rate spread increased to
3.63% in 2003 from 3.36% in 2002, an increase of 27 basis points. The increase
in the net interest rate spread was primarily due to the volume of interest
earning assets and interest bearing liabilities. Additionally, the Bank has
improved its asset mix by deploying a larger proportionate share of its funds
into loans. The decrease in the cost of deposits was primarily due to the
repricing of the Bank's time deposits into other deposit products at a lower
interest rate. The Corporation's net interest margin increased to 3.97% in 2003
from 3.94% in 2002.
45
The following table sets forth certain information relating to the Corporation's
consolidated average interest earning assets and interest bearing liabilities
and reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average daily balance of assets or liabilities, respectively, for
the periods presented. During the periods indicated, non-accruing loans, if any,
are included in the net loan category.
Year Ended December 31, 2004 Year Ended December 31, 2003
-------------------------------- --------------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
--------- -------- ------- --------- -------- -------
Assets
Interest bearing deposits with banks $ 9,305 $ 129 1.39% $ 13,667 $ 153 1.12%
Federal funds sold 10,602 161 1.52% 11,764 125 1.06%
Securities, available for sale 23,122 460 1.99% 21,033 522 2.48%
Loans 460,840 29,040 6.30% 329,720 22,764 6.90%
--------- -------- ---- --------- -------- ----
Sub-total earning assets 503,869 29,790 5.91% 376,184 23,564 6.26%
Other assets 19,715 20,988
--------- ---------
Total assets $ 523,584 $ 397,172
========= =========
Liabilities and stockholders' equity
Interest bearing deposits $ 393,004 $ 8,013 2.04% $ 297,103 $ 7,212 2.43%
Other borrowings 30,634 1,396 4.56% 30,697 1,419 4.62%
--------- -------- ---- --------- -------- ----
Sub-total interest bearing liabilities 423,638 9,409 2.22% 327,800 8,631 2.63%
Non-interest bearing deposits 45,456 35,311
Other liabilities 2,339 1,456
Stockholders' equity 52,151 32,605
--------- ---------
Total liabilities and stockholders' equity $ 523,584 $ 397,172
========= =========
Net interest income $ 20,381 $ 14,933
======== ========
Net interest rate spread 3.69% 3.63%
==== ====
Net interest margin on earning assets 4.04% 3.97%
==== ====
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.
46
(continued)
Year Ended December 31, 2002
----------------------------------
Average Average
(In thousands) Balance Interest Rate
--------- -------- -------
Assets
Interest bearing deposits with banks $ 7,242 $ 107 1.48%
Federal funds sold 12,144 204 1.68%
Securities, available for sale 26,944 1,044 3.87%
Loans 226,414 16,904 7.47%
--------- -------- ----
Sub-total earning assets 272,744 18,259 6.69%
Other assets 11,019
---------
Total assets $ 283,763
=========
Liabilities and stockholders' equity
Interest bearing deposits $ 205,080 $ 6,575 3.21%
Other borrowings 20,580 930 4.52%
--------- -------- ----
Sub-total interest bearing liabilities 225,660 7,505 3.33%
Non-interest bearing deposits 27,891
Other liabilities 1,069
Stockholders' equity 29,143
---------
Total liabilities and stockholders' equity $ 283,763
=========
Net interest income $ 10,754
========
Net interest rate spread 3.36%
====
Net interest margin on earning assets 3.94%
====
47
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.
Average Average Net Average Average Net
(In thousands) Balance Rate Change Balance Rate Change
------- -------- -------- ------- -------- -------
Assets
Interest bearing deposits with banks ($ 60) $ 36 ($ 24) $ 72 ($ 26) $ 46
Federal funds sold (18) 54 36 (4) (75) (79)
Securities, available for sale 42 (104) (62) (147) (375) (522)
Loans 8,263 (1,987) 6,276 7,132 (1,272) 5,860
------- -------- -------- ------- -------- -------
Total earning assets $8,227 ($ 2,001) $ 6,226 $ 7,053 ($ 1,748) $ 5,305
======= ======== ======== ======= ======== =======
Liabilities
Interest bearing deposits $1,955 ($ 1,154) $ 801 2,234 ($ 1,597) $ 637
Other borrowings (3) (20) (23) 468 21 489
------- -------- -------- ------- -------- -------
Total interest bearing liabilities $1,952 ($ 1,174) $ 778 $ 2,702 ($ 1,576) $ 1,126
======= ======== ======== ======= ======== =======
Net interest income $ 5,448 $ 4,179
======== =======
Net interest rate spread 0.06% 0.26%
======== =======
Net interest margin on earning assets 0.07% 0.03%
======== =======
PROVISION FOR LOAN LOSSES
2004 Compared to 2003. The provision for loan losses was $1,400,000 in 2004,
compared to $1,699,000 in 2003, a decrease of $299,000 or 18%. The decrease was
primarily due to slightly lower loan volume and lower net charge-offs during
2004. The provision for loan losses is 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, the relevant
change in the size and mix of the loan portfolio and current and projected
economic conditions. Management currently is not aware of any performing,
non-performing or impaired loans that are expected to result in a significant
charge-off during 2005.
2003 Compared to 2002. The provision for loan losses was $1,699,000 in 2003,
compared to $1,052,000 in 2002, an increase of $647,000 or 62%. The increase was
primarily due to increased loan volume and higher net charge-offs during 2003.
48
NON-INTEREST INCOME
2004 Compared to 2003. Non-interest income was $1,332,000 in 2004, compared to
$2,829,000 in 2003, a decrease of $1,497,000 or 53%. The decrease was primarily
due to a decrease in the gain on the sale of loans. The decrease in the gain on
the sale of loans was due to the decline in the level of refinancing activity
during 2004. Loans sold were $41.6 and $137.6 million in 2004 and 2003,
respectively. Management expects the current level of refinancing activity to
continue during 2005.
2003 Compared to 2002. Non-interest income was $2,829,000 in 2003, compared to
$1,674,000 in 2002, an increase of $1,155,000 or 69%. The increase was primarily
due to increases in the gain on the sale of loans. The increase in the gain on
the sale of loans was due to the continuation of refinancing activity at a high
level during 2003. Loans sold were $137.6 and $75.5 million in 2003 and 2002,
respectively.
NON-INTEREST EXPENSE
2004 Compared to 2003. Non-interest expense was $11,967,000 in 2004 compared to
$10,735,000 in 2003, an increase of $1,232,000 or 11%. The largest component of
the change in non-interest expense was salaries and employee benefits which
amounted to $7,722,000 in 2004. In 2003, salaries and employee benefits were
$6,231,000. The primary factors for the increase in salaries and employee
benefits expense was the first full year of operations of the full service
branch office in Southgate, Michigan and a regional lending center in Auburn
Hills, Michigan and the impact of the acquisition of the Bank of Washtenaw in
October of 2004. As of December 31, 2004, the number of full time equivalent
employees was 139 as compared to 119 as of December 31, 2003. Anticipated growth
during 2005 will require additional staff throughout most areas of the Bank.
The second largest component of the change in non-interest expense was
commissions on the sale of loans, which amounted to $267,000 in 2004. In 2003,
commissions on the sale of loans amounted to $912,000. The primary factor was
the decrease in the amount of loans, held for sale that were originated during
2004. The Bank originated $41,974,000 and $129,244,000 in loans, held for sale
during 2004 and 2003, respectively.
The third largest component of the change in non-interest expense was occupancy
and equipment expense, which amounted to $1,582,000 in 2004. In 2003, occupancy
and equipment expense amounted to $1,377,000. Primary factors in the increase
was the first full year of operations of the full service branch office in
Southgate, Michigan and the regional lending center in Auburn Hills, Michigan
and the acquisition of the Bank of Washtenaw, which operated two full service
branches and a regional lending center. In addition, the Bank completed
renovations of an operations center and an administrative center during the
fourth quarter of 2004. These facilities were occupied during the fourth quarter
of 2004 and house Community Bank Audit Services, Inc., Community Bank Mortgage,
Inc. and the Bank's commercial lending, finance, accounting, product support,
data operations and compliance departments.
49
2003 Compared to 2002. Non-interest expense was $10,735,000 in 2003 compared to
$7,372,000 in 2002, an increase of $3,363,000 or 46%. The largest component of
the change in non-interest expense was salaries and employee benefits which
amounted to $6,231,000 in 2003. In 2002, salaries and employee benefits were
$4,295,000. The primary factors for the increase in salaries and employee
benefits expense was the addition of a full service branch office in Southgate,
Michigan and a regional lending center in Auburn Hills, Michigan. As of December
31, 2003, the number of full time equivalent employees was 119 as compared to 95
as of December 31, 2002.
The second largest component of the change in non-interest expense was
commissions on the sale of loans, which amounted to $912,000 in 2003. In 2002,
commissions on the sale of loans amounted to $424,000. The primary factor was
the increase in the amount of loans, held for sale that were originated during
2003. The Bank originated $129,244,000 and $82,487,000 in loans, held for sale
during 2003 and 2002, respectively.
The third largest component of the change in non-interest expense was occupancy
and equipment expense, which amounted to $1,377,000 in 2003. In 2002, occupancy
and equipment expense amounted to $997,000. The primary factor in the increase
was the opening of a full service branch office in Southgate, Michigan and a
regional lending center in Auburn Hills, Michigan.
INCOME TAX PROVISION
2004 Compared to 2003. The income tax expense was $2,837,000 in 2004 compared to
$1,807,000 in 2003, an increase of $1,030,000 or 57%. The increase was primarily
due to the increase in income before federal income tax. Refer to Note I of the
Notes to Consolidated Financial Statements for additional information.
2003 Compared to 2002. The income tax expense was $1,807,000 in 2003 compared to
$1,357,000 in 2002, an increase of $450,000 or 33%. The increase was primarily
due to the increase in income before federal income tax. Refer to Note I of the
Notes to Consolidated Financial Statements for additional information.
50
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2004 AND DECEMBER 31, 2003
Assets. Total assets at December 31, 2004 were $652,662,000 compared to
$446,075,000 at December 31, 2003, an increase of $206,587,000 or 46%. The
increase was primarily due to increases in loans.
Securities Available for Sale. Total securities available for sale, at December
31, 2004 were $21,075,000 compared to $16,948,000 at December 31, 2003, an
increase of $4,127,000 or 24%. During 2004, the Corporation sold $29.2 million
in securities and $11.3 million in securities were called or matured. Funds from
the sale or call of securities were deployed into commercial loans at a higher
yield. The Bank's portfolio of securities available for sale has an amortized
cost of $22.1 million and a fair value of $21.1 million. The securities and
their weighted average yield at December 31, 2004 are as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ---------------- ------------------ ------------------
US Treasury securities $ 15,696 $ - ($ 62) $ 15,634
Mortgage backed securities 826 25 - 851
Corporate debt securities 1,550 - - 1,550
Municipal securities - - - 0
FHLMC preferred stock 4,000 - (960) 3,040
--------------- ---------------- ------------------ ------------------
Totals $ 22,072 $ 25 ($ 1,022) $ 21,075
=============== ================ ================== ==================
A maturity and repricing schedule of the securities portfolio at December 31,
2004 is listed below (in thousands):
Less than one year One to five years Over five years
-------------------- --------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Amount Yield Amount Yield Amount Yield Total
--------- -------- --------- -------- -------- -------- ----------
US Treasury securities $ 7,966 2.26% $ 7,668 2.71% - - $ 15,634
Mortgage backed securities 47 4.90% - - 804 5.86% 851
Corporate debt securities 1,550 2.25% - - - - 1,550
FHLMC preferred stock 3,040 1.14% - - - - 3,040
--------- -------- --------- -------- -------- -------- ----------
Totals $ 12,603 $ 7,668 $ 804 $ 21,075
========= ========= ======== ==========
The entire portfolio has a net unrealized loss of $997,000. The unrealized loss
is reflected by an adjustment to stockholders' equity. The Corporation does not
hold any securities in the "Held to Maturity" category nor does the Corporation
hold or utilize derivatives.
51
The unrealized loss in the Bank's securities portfolio is primarily related to
the unrealized loss of a single security. This security is an issue of 80,000
shares of FHLMC preferred stock with a par value of $50 per share. The Bank
purchased this equity security in March of 2001. The security carried an initial
interest rate of 4.50% until March 31, 2002. Thereafter, the interest rate
reprices annually on April 1 of each year to a rate equal to the 12 month LIBOR
minus 20 basis points. Additionally, the dividend on this security is 70% tax
deductible. This feature increases the effective yield significantly. As
interest rates declined in 2002 and 2003, the yield on this security also
declined.
During 2004, the market value of this security was negatively impacted for two
primary factors. The first factor was the declining interest rate environment.
Short term interest rates declined during 2002 and 2003 and began to increase
during 2004. The yield on this security does not react immediately to shifts in
interest rates because of the annual adjustment feature. The coupon on this
security did not benefit from the rise in short term interest rates during 2004
due to the timing of the coupon reset date. As the next coupon reset date has
approached, the market value of this security has reacted positively. A
repricing and market value table for selected dates is listed below:
Market Value
Rate (per share)
---- ------------
3/23/2001 4.50% $ 50.00
4/1/2002 2.82% $ 50.00
4/1/2003 1.14% $ 50.00
4/1/2004 1.14% $ 46.25
6/30/2004 1.14% $ 46.05
9/30/2004 1.14% $ 39.00
12/31/2004 1.14% $ 38.00
2/28/2005 1.14% $ 43.00
The coupon rate, if reset on March 24, 2005 would be 3.62%. Based on the tax
deductibility of the dividend, the tax equivalent yield of this security, if
reset on March 24, 2005, would be 4.93%. Based on the current level of short
term interest rates and the rising interest rate environment, management expects
the market value of this security to continue its upward trend.
The second factor in the market value of this security has been the discovery of
certain accounting irregularities at FHLMC and FNMA that have raised questions
about the credit quality of these organizations. The timing of the decline in
the market value of the security also coincides with the public announcements of
these accounting irregularities that occurred.
According to SFAS 115 - Accounting for Certain Investments in Debt and Equity
Securities, the characterization of a security with an other than temporary
impairment is subjective but generally exists when an investor is unlikely to be
able to collect all amounts due according to the contractual terms of the
security. Other factors that suggest other than temporary impairment of a
security would be the downgrading of the security by a rating agency or the
deterioration of the financial condition of the issuer.
Management expects the market value of this security to continue to improve
during 2005 as the coupon of this security will increase significantly.
Additionally, management expects the market value of this security will improve
as the investment community considers the impact of changes made by the Board of
FHLMC, such as changes in leadership and auditors, designed to improve the
quality of financial reporting at FHLMC. Furthermore, management possesses the
intent and the ability to hold this security for a period of time sufficient to
allow for the recovery of this security's fair value.
52
Loans. Total loans at December 31, 2004 were $587,562,000 compared to
$400,958,000 at December 31, 2003, an increase of $186,604,000 or 47%. The
components of the outstanding balances for the years ended December 31, are as
follows (in thousands):
2004 2003 2002 2001 2000
---------- --------- ---------- ---------- ---------
Consumer loans $ 42,149 $ 25,200 $ 22,170 $ 18,773 $ 18,649
Commercial, financial, & other 129,103 68,922 46,187 28,920 26,588
Commercial real estate construction 72,286 50,087 30,083 10,463 2,290
Commercial real estate mortgages 296,934 208,305 139,243 90,200 49,900
Residential real estate mortgages 47,090 48,444 29,839 32,536 30,677
---------- --------- ---------- ---------- ---------
$ 587,562 $ 400,958 $ 267,522 $ 180,892 $ 128,104
========== ========= ========== ========== =========
During 2004, loans increased in most categories with stronger growth in all
commercial loan categories. Residential real estate mortgages declined slightly.
The increase includes the acquisition of $67.1 million in loans from the
acquisition of the Bank of Washtenaw, which consisted of the following (in
thousands):
Loans acquired
--------------
Consumer loans $ 13,612
Commercial, financial, & other 15,413
Commercial real estate construction 7,104
Commercial real estate mortgages 30,050
Residential real estate mortgages 962
--------------
Total loans acquired $ 67,141
==============
The additional increase in commercial real estate mortgage loans, commercial
real estate construction loans and other commercial loans was a result of the
addition of one additional commercial loan officer and a solid business
development program.
The Bank expects the percentage of total commercial loans and residential real
estate mortgages to increase as a percentage of the loan portfolio in 2005 via
business development programs. Additionally, the Bank expects the largest loan
growth to occur in the commercial real estate mortgage category. These types of
loans carry a relatively large average balance, produce more cross-selling
opportunities and are typically well secured by real estate. The Bank believes
that the higher level of risk that is also inherent with these types of loans is
offset by the Bank with high standards for credit quality and a well-seasoned
group of commercial lenders.
53
A maturity and repricing schedule of the loan portfolio, which distributes fixed
rate loans by maturity date and adjustable rate loans by repricing date at
December 31, 2004 is listed below (in thousands):
Within Three to One to After
Three Twelve Five Five
Months Months Years Years Total
-------- -------- -------- ------- --------
Consumer loans $ 38,538 $ 410 $ 2,035 1,104 $ 42,087
Commercial, financial & other 91,853 2,391 30,126 4,144 128,514
Commercial real estate construction 68,731 1,551 545 934 71,761
Commercial real estate mortgages 80,095 9,545 194,992 10,833 295,465
Residential real estate mortgages 997 8,081 29,579 8,122 46,779
-------- -------- -------- ------- --------
$280,214 $ 21,978 $257,277 $25,137 584,606
======== ======== ======== =======
Non-accrual loans 2,956
--------
Total loans $587,562
========
Loans at fixed interest rates $ 5,459 $ 12,362 $221,938 $24,449 $264,208
Loans at variable interest rates 274,755 9,616 35,339 688 320,398
-------- -------- -------- ------- --------
$280,214 $ 21,978 $257,277 $25,137 584,606
======== ======== ======== =======
Non-accrual loans 2,956
--------
Total loans $587,562
========
Variable rate loans comprise 55% of the loan portfolio. The interest rates of
these loans change or reprice at specific intervals according to certain market
indices. The remainder of the loan portfolio has a fixed interest rate until
maturity.
The Bank automatically places any loan that has been partially charged-off and
most consumer loan borrowers in bankruptcy proceedings on non-accrual. The Bank
on a discretionary basis places loans on non-accrual when a borrower is in
bankruptcy where adequate security cannot be demonstrated and the borrower
ceases paying interest. All other loans are typically placed on non-accrual
after the borrower is ninety days or more past due unless collection is expected
within 60 days. Refer to Note C of the Notes to the Consolidated Financial
Statements for additional information.
54
Allowance for Loan Losses. The allowance for loan losses at December 31, 2004
was $5,884,000 compared to $4,314,000 at December 31, 2003, an increase of
$1,570,000 or 36%. The increase was primarily to provide for the growth in the
loan portfolio during 2004. Transactions in the allowance for loan losses for
the years ended December 31, are as follows (in thousands):
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Balance, beginning of year $4,314 $2,875 $1,922 $1,252 $ 781
Allowance on loans acquired 184 - - - -
Charge-offs:
Consumer loans 31 38 32 43 21
Commercial, financial & other - 141 141 251 20
Commercial real estate construction - 50 - - -
Commercial real estate mortgages 100 124 - - -
Recoveries:
Consumer loans 13 13 9 32 2
Commercial, financial & other 104 30 65 12 -
Commercial real estate construction - 50 - - -
Commercial real estate mortgages - - - - -
------ ------ ------ ------ ------
Net charge-offs 14 260 99 250 39
Additions charged to operations 1,400 1,699 1,052 920 510
------ ------ ------ ------ ------
Balance at end of period $5,884 $4,314 $2,875 $1,922 $1,252
====== ====== ====== ====== ======
Allowance to total loans 1.00% 1.08% 1.07% 1.06% 0.98%
====== ====== ====== ====== ======
Net Charge-offs to average loans 0.00% 0.08% 0.04% 0.17% 0.04%
====== ====== ====== ====== ======
The increase in the allowance 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 for the Bank and for other
banks in the peer group on such types of loans, the relevant change in the size
and mix of the Bank's loan portfolio and current and projected economic
conditions. Additionally, the Bank acquired allowance for loan losses in the
amount of $184,000. This amount represented $752,000 in the allowance for loan
loss less $568,000 in charge-offs that were identified in the Bank of
Washtenaw's loan portfolio prior to the acquisition and were charged off at
consummation.
55
The allocation of the allowance for loan losses as of December 31, is as follows
(in thousands):
Total
-------------------------------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Consumer loans $ 551 $ 337 $ 282 $ 296 $ 241
Commercial, financial, & other 1,653 972 660 578 578
Commercial real estate construction 976 639 312 6 1
Commercial real estate mortgages 2,302 1,899 1,344 828 274
Residential real estate mortgages 402 467 277 214 158
------ ------ ------ ------ ------
$5,884 $4,314 $2,875 $1,922 $1,252
====== ====== ====== ====== ======
Percent of allowance for loan losses in each category
to total allowance for loan losses
-------------------------------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Consumer loans 9.37% 7.81% 9.81% 15.40% 19.25%
Commercial, financial, & other 28.09% 22.53% 22.96% 30.07% 46.17%
Commercial real estate construction 16.59% 14.81% 10.85% 0.31% 0.08%
Commercial real estate mortgages 39.12% 44.02% 46.75% 43.08% 21.88%
Residential real estate mortgages 6.83% 10.83% 9.63% 11.13% 12.62%
------ ------ ------ ------ ------
100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
Percent of loans in each category to total loans
-------------------------------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Consumer loans 7.17% 6.27% 8.29% 10.38% 14.56%
Commercial, financial, & other 21.97% 17.22% 17.26% 15.99% 20.76%
Commercial real estate construction 12.30% 12.55% 11.25% 5.78% 1.78%
Commercial real estate mortgages 50.54% 51.92% 52.05% 49.86% 38.95%
Residential real estate mortgages 8.02% 12.04% 11.15% 17.99% 23.95%
------ ------ ------ ------ ------
100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
56
Bank Premises and Equipment. Bank Premises and equipment at December 31, 2004
were $13,124,000 compared to $5,554,000 at December 31, 2003, an increase of
$7,570,000 or 136%. During the fourth quarter of 2004, the Bank completed the
renovation of an Operations Center in Allen Park, Michigan and an Administration
Building in Dearborn, Michigan. The total expenditures for the purchase and
renovation of the Operations Center and the Administration Building during 2004
were $4,600,000 and $1,800,000, respectively. The Operations Center houses the
Accounting, Data Operations, Product Support and Compliance departments of the
Bank as well as Community Bank Audit Services, Inc. and Community Bank Mortgage,
Inc. The Administration Building houses the Bank's Executive, Human Resources
and Commercial Lending Departments.
Real Estate Owned. Real estate owned at December 31, 2004 was $138,000, compared
to $0 at December 31, 2003. Real estate owned at December 31, 2004 is comprised
of two residential properties with an appraised value of $182,000. The Bank
expects to realize a gain as a result of the sale of these properties during
2005.
Goodwill and other intangible assets. Goodwill and other intangible assets were
$7,982,000 at December 31, 2004, compared to $0 at December 31, 2003. The Bank
has intangible assets for the estimated value of core deposit accounts acquired
in the acquisition of the Bank of Washtenaw. The intangible values represent the
present value of the net revenue streams attributable to these intangibles. The
core deposit intangible amounted to $929,000 and is being amortized over ten
years.
The balance of the acquisition price in excess of the fair market value of the
assets and liabilities acquired, including intangible assets, was recorded as
goodwill and totaled $7.1 million. Goodwill is defined as an intangible asset
with an indefinite useful life, and as such, is not amortized, but is required
to be tested annually for impairment of the value. If impaired, an impairment
loss must be recorded for the value equal to the excess of the asset's carrying
value over its fair value.
Accrued Interest Receivable. Accrued interest receivable at December 31, 2004
was $1,889,000 compared to $1,461,000 at December 31, 2003, an increase of
$428,000 or 29%. The increase was primarily due to increase in loans.
Other Assets. Other assets at December 31, 2004 were $3,093,000 compared to
$1,742,000 at December 31, 2003, an increase of $1,351,000 or 78%. The increase
was largely due to an increase in the Corporation's deferred tax asset.
57
Deposits. Total deposits at December 31, 2004 were $540,880,000 compared to
$379,619,000 at December 31, 2003, an increase of $161,261,000 or 42%. The
components of the outstanding balances and percentage increase in deposits from
2003 to 2004 are as follows (in thousands):
December 31, 2004 December 31, 2003
----------------- ----------------- Percent
Balance Percent Balance Percent Increase/(Decrease)
-------- ------- -------- ------- -------------------
Non-interest bearing:
Demand $ 63,065 11.66% $ 39,081 10.29% 61.37%
-------- --------
Interest bearing:
Checking $ 15,400 2.85% $ 24,069 6.34% (36.02%)
Money market 54,957 10.16% 10,998 2.90% 399.70%
Savings 83,773 15.49% 126,596 33.35% (33.83%)
Time, under $100,000 124,448 23.01% 65,120 17.15% 91.11%
Time, $100,000 and over 199,237 36.84% 113,755 29.97% 75.15%
-------- ------- -------- ------- ------
477,815 88.34% 340,538 89.71% 40.31%
-------- ------- -------- ------- ------
$540,880 100.00% $379,619 100.00% 42.48%
======== ======= ======== ======= ======
The increase in deposits includes the acquisition of $66.1 million in deposits
from the acquisition of the Bank of Washtenaw, which consisted of the following:
Deposits Acquired
-----------------
Non-interest bearing:
Demand $ 11,400
---------
Interest bearing:
Checking $ 8,800
Money market 7,500
Savings 2,600
Time, under $100,000 21,400
Time, $100,000 and over 14,400
---------
54,700
---------
$ 66,100
=========
The remaining increase in deposits was primarily due to growth in various types
of deposits. During 2004, the Bank completed an annual birthday celebration in
March 2004 and three time deposit promotions 2004. The time deposit promotions
featured a ten month certificate of deposit in March 2004, a fifteen month
certificate of deposit in June 2004 and an eighteen month certificate of deposit
in July 2004. The Bank's management developed these campaigns in order to
increase liquidity and diversify the Bank's time deposit mix.
58
In addition to these deposit campaigns, the Bank has enacted a strategy to
utilize public funds to a higher degree, in the form of time deposits, $100,000
and over, in the State of Michigan. The Bank will also utilize brokered deposits
on a limited basis. In order to coordinate and manage these efforts, the Bank
has also designated a public funds officer. Public funds at December 31, 2004
were $92.9 million compared to $61.0 million at December 31, 2003. There were 35
and 19 entities with public funds on deposit at December 31, 2004 and December
31, 2003, respectively. The average term of time deposits invested with the Bank
by public units was 183 and 187 days at December 31, 2004 and 2003,
respectively. Additional growth in all types of deposits was achieved via a
strong business development program which includes normal marketing,
telemarketing, referral and visitation programs.
The Corporation has historically relied heavily on time deposits as a percentage
of total deposits to fund the growth of the Corporation. These deposits are
sensitive to changes in the interest rate environment. The Bank has diversified
the deposit mix since 2001 by shifting maturing time deposits and attracting new
deposits into other deposit products. The proportion of time deposits to total
deposits decreased to 60% at December 31, 2004 from 70% at December 31, 2000.
Final maturities of total time deposits are as follows (in thousands):
$100,000 Less than
and over $100,000 Total
-------- --------- ---------
Due in three months or less $ 70,751 $ 27,394 $ 98,145
Due in over three months through six months 25,789 7,983 33,772
Due in over six months through one year 38,904 38,560 77,464
Due in over one year through five years 63,793 50,511 114,304
-------- --------- ---------
$199,237 $ 124,448 $ 323,685
======== ========= =========
The following is a summary of the distribution and weighted average interest
rate of deposits at December 31 (in thousands):
2004 2003
--------------------- ---------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------- -------- --------- --------
Non-interest bearing:
Demand $ 63,065 - $ 39,081 -
--------- ---------
Interest bearing:
Checking $ 15,400 1.44% $ 24,069 1.11%
Money market 54,957 1.94% 10,998 0.99%
Savings 83,773 1.00% 126,596 1.95%
Time, under $100,000 124,448 2.73% 65,120 2.57%
Time, $100,000 and over 199,237 2.64% 113,755 2.23%
--------- ---------
477,815 340,538
--------- ---------
$ 540,880 $ 379,619
========= =========
59
During the third and fourth quarters of 2004, the Corporation began to reprice
its time deposits at higher rates than 2003 due to a increasing rate
environment. The Bank continues a strategy of shifting maturing time deposits
into other savings products. In addition, the Bank continued to enact a strategy
to utilize municipal deposits to a greater degree. Management believes that the
weighted average rate of deposits will continue to increase during 2005.
Federal Home Loan Bank Advances. Federal Home Loan Bank advances at December 31,
2004 amounted to $20,614,000 compared to $20,638,000 at December 31, 2003, a
decrease of $24,000.
In 1999, the Bank joined the Federal Home Loan Bank of Indianapolis. Membership
in the Federal Home Loan Bank provides the Bank with a stable source of
additional funding at a reasonable cost. Federal Home Loan Bank advances are
collateralized with a blanket collateral agreement with the Federal Home Loan
Bank and investment securities, available for sale. Please refer to Note G of
the Notes to the Consolidated Financial Statements for additional information.
Other Borrowings. Other borrowings were $4,115,000 at December 31, 2004 compared
to $0 at December 31, 2003. These borrowings were comprised of several
repurchase agreements that were acquired in the acquisition of the Bank of
Washtenaw. These repurchase agreements are secured by securities held by the
Bank.
Other Liabilities. Other liabilities were $1,342,000 at December 31, 2004
compared to $463,000 at December 31, 2003, an increase of $879,000 or 190%. The
increase was primarily due to accrued expenses.
Accrued Interest Payable. Accrued interest payable at December 31, 2004 was
$1,107,000 compared to $754,000 at December 31, 2003, an increase of $353,000 or
47%. The increase was due to the increase in deposits during 2004.
Subordinated Debentures. On December 19, 2002, the Corporation issued
$10,000,000 of floating rate obligated mandatory redeemable securities through a
special purpose entity as part of a pooled offering. The securities have a term
of thirty years. The Corporation may redeem the securities after five years at
face value. They are considered to be Tier 1 capital for regulatory capital
purposes. The funds from the issue of these securities were invested into
securities available for sale until they can be invested into the Bank to allow
for additional growth.
60
CAPITAL
Stockholders' equity at December 31, 2004 was $74,604,000 compared to
$34,601,000 as of December 31, 2003, an increase of $40,003,000 or 116%. The
increase was primarily due to the sale of 1,328,250 shares of its common stock
at $24.76 per share in a firm commitment underwritten offering lead managed by
Oppenheimer & Co., Inc. and co-managed by Howe Barnes Investments, Inc.
Additionally, the underwriters exercised an option to purchase 142,665
additional shares of common stock from the Corporation solely to cover
over-allotments. The offering was priced on July 19, 2004 and closed on July 23,
2004. The number and price of shares issued has been adjusted for stock
dividends. The net proceeds of the sale of common stock were $34,040,000. The
Corporation used $15.1 million of the net proceeds for the acquisition of the
Bank of Washtenaw on October 29, 2004. The Corporation will use the remaining
net proceeds to increase the Bank's capital position in anticipation of future
growth, and for other general corporate purposes. The increase in stockholders
equity was also due to net income during 2004.
At December 31, 2004 and 2003, the Bank and Corporation exceeded all applicable
regulatory capital requirements as described in Note M of the Notes to the
Consolidated Financial Statements.
MARKET RISK ANALYSIS
The Corporation's primary market risk exposure is interest rate risk and, to a
lesser degree liquidity risk. All of our transactions are denominated in U. S.
dollars with no specific foreign exchange exposure. The Corporation has no
agricultural-related loan assets and therefore have no significant exposure to
changes in commodity prices. Any impact that changes in foreign exchange rates
and commodity prices would have on interest rates are assumed to be
insignificant. Interest rate risk is the exposure of our financial condition to
adverse movements in interest rates. We derive our income primarily from the
excess of interest collected on our interest-earning assets over the interest
paid on our interest-bearing liabilities. The rates of interest earned on the
assets and owed on our liabilities of the Corporation generally are established
contractually for a period of time. Since market interest rates change over
time, we are exposed to lower profitability if we cannot adapt to interest rate
changes. Accepting interest rate risk can be an important source of
profitability and shareholder value; however, excessive levels of interest rate
risk could pose a significant threat to our earnings and capital base.
Accordingly, effective risk management that maintains interest rate risk at
prudent levels is essential to our safety and soundness.
Interest Rate Sensitivity Analysis. Evaluating the exposure to changes in
interest rates includes assessing both the adequacy of the process used to
control interest rate risk and the quantitative level of exposure. The
Corporation's interest rate risk management process seeks to ensure that
appropriate policies, procedures, management information systems and internal
controls are in place to maintain interest rate risk at prudent levels with
consistency and continuity. In evaluating the quantitative level of interest
rate risk, we assess the existing and potential future effects of changes in
interest rates on our financial position, including capital adequacy, earnings,
liquidity and asset quality.
The Corporation primarily uses two interest rate risk measurement techniques.
The first, which is commonly referred to as GAP analysis, measures the
difference between the dollars amounts of interest-sensitive assets and
liabilities that will be repriced or mature during a given time period. The
Corporation has sought to manage its exposure to changes in interest rates by
matching more closely the effective maturities or repricing characteristics of
the Corporation's interest earning assets and interest bearing liabilities. The
matching of the assets and liabilities may be analyzed by examining the extent
to which the assets and liabilities are interest rate sensitive and by
monitoring the expected effects of interest rate changes on net interest income.
An asset or liability is interest rate sensitive within a specific time period
if it will mature or reprice within that time period. If the Corporation's
assets mature or reprice more quickly or to a greater extent than 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.
61
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 expected and would tend to
increase the negative gap position. Conversely, during a period of falling
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 December 31, 2004 which are expected
to mature or reprice in each of the time periods shown below.
Interest Rate Sensitivity Period
-----------------------------------------------------
1-90 91-365 1-5 Over
(In thousands) Days Days Years 5 Years Total
--------- --------- --------- --------- ---------
Earning assets
Federal funds sold $ 12,640 $ - $ - $ - $ 12,640
Interest bearing deposits with Banks 2,283 - - - 2,283
Mortgage loans held for sale 1,692 - - - 1,692
Securities available for sale 3,546 10,016 6,709 803 21,074
Federal Home Loan Bank stock 1,122 - - - 1,122
Total loans, net of non-accrual 281,553 20,658 257,277 25,137 584,625
--------- --------- --------- --------- ---------
Total earning assets 302,836 30,674 263,986 25,940 623,436
Interest bearing liabilities
Total interest bearing deposits 252,274 111,237 114,304 - 477,815
Federal Home Loan Bank advances - 10,025 10,589 - 20,614
Other Borrowings 4,115 - - - 4,115
Trust preferred securities 10,000 - - - 10,000
--------- --------- --------- --------- ---------
Total interest bearing liabilities 266,389 121,262 124,893 - 512,544
Net asset (liability) funding gap 36,447 (90,588) 139,093 25,940 $ 110,892
--------- --------- --------- --------- ---------
Cumulative net asset (liability) funding gap $ 36,447 ($ 54,141) $ 84,952 $ 110,892
========= ========= ========= =========
The second interest rate measurement used is commonly referred to as net income
simulation analysis. We believe that this methodology provides a more accurate
measurement of interest rate risk than GAP analysis. The simulation model
assesses the directions and magnitude of variations in net interest income
resulting from potential changes in market interest rates. Key assumptions in
the model include prepayment speeds on various loan and investment assets; cash
flows and maturities of interest-sensitive assets and liabilities; and changes
in market conditions impacting loan and deposit volume and pricing. These
assumption are inherently uncertain, subject to fluctuation and revision in a
dynamic environment; therefore, the model cannot precisely estimate net interest
income or exactly predict the impact of higher or lower interest rates on net
interest income. Actual results will differ from simulated results due to
timing, magnitude, and frequency of interest rate changes, changes in market
conditions and our strategies, among other factors.
62
We conducted an interest rate simulation as of December 31, 2004, that assumed a
gradual change in market rates occurred over the following twelve months. The
following table reflects the suggested impact on net interest income over the
next twelve months (dollars, in thousands):
Change in Net Interest Income
Interest Rate Change Amount Percent
--------- -------
+ 300 Basis Points $ 10,213 37.31%
+ 200 Basis Points 4,770 17.43%
+ 100 Basis Points 1,175 4.29%
- - 100 Basis Points (1,419) (5.18%)
- - 200 Basis Points (4,721) (17.25%)
- - 300 Basis Points (6,697) (24.46%)
Liquidity 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, Federal Home Loan Bank advances and a federal funds purchase credit
facility.
The following tables provide information about the Bank's contractual
obligations and commitments at December 31, 2004 (in thousands):
Contractual Obligations
Payments Due By Period
Less Than 1-3 3-5 Over 5
1 Year Years Years Years Total
--------- -------- ------- -------- --------
Securities sold under
agreements to
repurchase $ 4,115 $ - $ - $ - $ 4,115
Long-term borrowings 25 15,589 5,000 - 20,614
Lease commitments 574 1,017 799 605 2,995
Subordinated debentures - - - 10,000 10,000
--------- -------- ----------------- --------
Totals $ 4,714 $ 16,606 $ 5,799 $ 10,605 $ 37,724
========= ======== ================= ========
Unused Loan Commitments and Letters of Credit
Amount Of Commitment Expiration Per Period
Less Than 1-3 3-5 Over 5
1 Year Years Years Years Total
--------- -------- ------- -------- ---------
Unused loan commitments $ 66,700 $ 13,446 $ 3,978 $ 25,286 $ 109,410
Standby letters of credit 2,574 3,000 - - 5,574
--------- -------- ------- -------- ---------
Totals $ 69,274 $ 16,446 $ 3,978 $ 25,286 $ 114,984
========= ======== ======= ======== =========
63
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements presented herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time due to inflation. The primary
impact of inflation is reflected in the increased cost of the Corporation's
operations. Unlike most industrial companies, virtually all the assets and
liabilities of the Corporation are monetary in nature. As a result, interest
rates have a more significant impact on a financial institution's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction, or to the same extent, as the prices of
goods and services.
TECHNOLOGY
The Corporation, operating as an independent, local community bank, strives to
make available to its employees and customers a high level of technology as a
way to be competitive with other larger financial institutions.
In July 2001, the Bank began operation of a voice response, automatic telephone
banking service available 24 hours a day. The Bank began operating a new deposit
and check imaging system in August 2001, which has helped to streamline its
check operations and improve statement delivery. The Bank purchased a
windows-based teller system in November 2002, which will improve the efficiency
of the Bank's retail operations. This system was operational in February 2003.
During 2003, the Bank also contracted with a firm to perform a comprehensive
technology review of the Bank's technology systems and the Bank's utilization of
those systems. Management will utilize that review to develop and implement a
plan to utilize the Bank's technology systems more efficiently. During 2004, the
Bank began to offer Internet Banking and completed its development of a website.
64
DEARBORN BANCORP, INC.
DIRECTORS AND OFFICERS
DIRECTORS
MARGARET I. CAMPBELL RICHARD NORDSTROM
Retired, Manufacturing Retired, Architect
JOHN E. DEMMER MIICHAEL J. ROSS
Chairman of the Board and President and Chief Executive Officer
Chief Executive Officer Community Bank of Dearborn
Jack Demmer Ford, Inc.;
Jack Demmer Lincoln-Mercury, Inc. and DR. ROBERT C. SCHWYN
Jack Demmer Leasing Physician
WILLIAM J. DEMMER RONNIE J. STORY
President President and Chief Executive Officer
Jack Demmer Ford, Inc and Story Development Corp. and Story Brothers Grading
Jack Demmer Lincoln-Mercury, Inc. & Excavating
MICHAEL V. DORIAN, JR. OFFICERS
Vice President
Mike Dorian Ford JOHN E. DEMMER
Chairman of the Board
DAVID HIMICK
Retired, Industrial Supply RICHARD NORDSTROM
Vice Chairman
DONALD G. KARCHER
Chairman of the Board MICHAEL J. ROSS
Karcher Agency, Inc. President and Chief Executive Officer
BRADLEY F. KELLER JEFFREY L. KARAFA
President Vice President, Treasurer and Secretary
Braden Associates, Inc. and
MultiGard Properties, Ltd.
JEFFREY G. LONGSTRETH
Real Estate Broker
Century 21 - Curran & Christie
65
COMMUNITY BANK OF DEARBORN
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS MICHAEL J. ROSS
President and Chief Executive Officer
MARGARET I. CAMPBELL Community Bank of Dearborn
Retired, Manufacturing
DR. ROBERT C. SCHWYN
JOHN E. DEMMER Physician
Chairman of the Board
Jack Demmer Ford, Inc.; RONNIE J. STORY
Jack Demmer Lincoln-Mercury, Inc. and President and C.E.O.
Jack Demmer Leasing Story Development Corp. and Story Brothers Grading
& Excavating
WILLIAM J. DEMMER
President EXECUTIVE OFFICERS
Jack Demmer Ford, Inc. and
Jack Demmer Lincoln Mercury
MICHAEL J. ROSS
MICHAEL V. DORIAN, JR. President
Vice President Chief Executive Officer
Mike Dorian Ford
WALTER G. BYERS
DAVID HIMICK Washtenaw Regional President
Retired, Industrial Supply
JEFFREY L. KARAFA
DONALD G. KARCHER Senior Vice President
Chairman of the Board CFO & Secretary
Karcher Agency, Inc.
WILLIAM T. LAROSA
BRADLEY F. KELLER Oakland Regional President
President
Braden Associates, Inc. and WARREN R. MUSSON
MultiGard Properties, Ltd. Senior Vice President
Head of Lending
JEFFREY G. LONGSTRETH
Real Estate Broker STEPHEN C. TARCZY
Century 21 - Curran & Christie Northeast Regional President
RICHARD NORDSTROM JEFFREY J. WOLBER
Retired, Architect Senior Vice President
Branch Operations
66
COMMUNITY BANK OF DEARBORN
OFFICERS
TERRENCE R. O'NEIL REGAN J. MORIN DON A. PLAISTED
First Vice President Vice President Assistant Vice President
Credit Administration Commercial Lending Commercial Lending
GARY AMES, JR. CYNTHIA A. PIZZO SUSAN M. VETTRAINO
Vice President Vice President Assistant Vice President
Controller Branch Officer Loss Prevention
KEVIN A. BANK JAMES T. POWERS PAMELA G. WILKS
Vice President Vice President Assistant Vice President
Commercial Lending Customer/Product Support Product Support
MARK H. BOBINSKI H. KRISTENE RAUTIO DEBBY M. ASTERIOU
Vice President Vice President Treasury Officer
Commercial Lending Business Development
PATRICIA CARMONA
DANIEL P. BROPHY DENNIS C. ROCHELEAU Accounting Officer
Vice President Vice President
Senior Commercial Lender Cashier PATRICIA D. CONSIDINE
Branch Officer
DANIEL A. BZURA SANDRA M. ROSS
Vice President Vice President THOMAS M. GOTELAERE
Branch Administration Regional Branch Administration Mortgage Loan Officer
RITA L. CAVATAIO GARY P. RUSCH KAREN R. HENDERSHOT
Vice President Vice President Branch Officer
Commercial Lending Commercial Lending
RICHARD T. JONES
GEORGE J. DEMOU WILLIAM M. SCHMIDT Business Development Officer
Vice President Vice President
Commercial Lending Senior Commercial Lender DAVID W. LESLIE
Commercial Loan Officer
DANIEL P. FOSS GREGORY M. SCHNEIDER
Vice President Vice President ELIZABETH A. PIZZO
Commercial Lending Commercial Lending Human Resources Officer
JEFFREY S. GRENDYSA THEODORE A. SCHORK SUZANNE C. SCHULTZ
Vice President Vice President Loan Operations Officer
Mortgage Operations Senior Commercial Lender
TIMOTHY SERPIEN
JIHAD A. HACHEM STEVEN P. SLADE Branch Officer
Vice President Vice President
Commercial Lending Consumer Lending ANTOINETTE TARCZY
Branch Officer
F. GLEN ISLAMI KAREN M. COVER
Vice President Assistant Vice President CHARLES P. WASCZENSKI
Compliance Regional Branch Administration Audit Officer
CHRISTINE G. JOHNSON DENIS T. NISSLE CAROLYN A. WILKINS
Vice President Assistant Vice President Corporate Services Officer
Private Banking Private Banking
MARIAN ZELEJI
WYNN C. MILLER MIHAI PARASCA Mortgage Loan Officer
Vice President Assistant Vice President
Internal Audit Computer Systems & Network
67
COMMUNITY BANK OF DEARBORN
SUBSIDIARIES
COMMUNITY BANK INSURANCE AGENCY, INC.
Michael J. Ross, President
COMMUNITY BANK MORTGAGE, INC.
Daniel P. Brophy, President
COMMUNITY BANK AUDIT SERVICES, INC.
Wynn C. Miller, President
NORTHEAST REGION
AUXILIARY BOARD OF DIRECTORS
DAVID B. BERGMAN
Partner
Sigma Investment Counselors
DR. MICHAEL J. BUSUITO
Physician
GERALD J. CARNAGO
Attorney at Law & Certified Public Accountant
Carnago & Associates, P.C.
MICHAEL P. GUERRA
Owner
Millcreek Building Company
VITO A. PAMPALONA
President
Vito Anthony Homes and Building Company
JAMES A. PATRONA
Owner
Universal Press & Machinery, Inc.
68
COMMUNITY BANK OF DEARBORN
LOCATIONS
Ann Arbor Eisenhower and Washtenaw Regional Dearborn Office
Lending Center 22290 Michigan Avenue
250 West Eisenhower Parkway, Suite 100 Dearborn, MI 48124
Ann Arbor, MI 48103 Phone: (313) 274-1000
Phone: (734) 429-3828 Fax: (313) 274-5050
Fax: (734) 429-9294 Cynthia A. Pizzo, VP & Branch Manager
Walter G. Byers, Washtenaw Regional President
Nancy Bednarz, Personal Banker
Dearborn Heights
Ann Arbor - Stadium 24935 West Warren Avenue
2180 West Stadium Boulevard Dearborn Heights, MI 48127
Ann Arbor, MI 48103 Phone: (313) 724-0100
Phone: (734) 429-3828 Fax: (313) 724-1010
Fax: (734) 429-9294 Kim Keleman, Branch Manager
Karen R. Hendershot, Branch Officer
Dearborn Administration and
Regional Lending Center
Auburn Hills and Oakland Regional Lending Center 1360 Porter Street, Suite 200
3201 University Drive, Suite 180 Dearborn, MI 48124
Auburn Hills, MI 48326 Phone: (313) 565-5700
Phone: (248) 364-9700 Fax: (313) 561-2291
Fax: (248) 364-9701 Warren R. Musson, Senior VP & Head of Lending
William T. LaRosa, Oakland Regional President
Tim Sierpien, Branch Officer Plymouth Township
44623 Five Mile
Plymouth, MI 48170
Canton Township Phone: (734) 454-1000
1325 N. Canton Center Road Fax: (734) 454-0123
Canton, MI 48187 Mara Sears, Branch Manager
Phone: (734) 981-0022
Fax: (734) 981-0033
Jennifer Learning, Branch Manager Southgate
12820 Fort Street
Southgate, MI 48195
Clinton Township Phone: (734) 284-3300
19100 Hall Road Fax: (734) 284-3311
Clinton Township, MI 48038 Gary D. Zanley, Branch Manager
Phone: (586) 416-4400
Fax: (586) 416-6200
Antoinette Tarczy, Branch Officer Saline
450 East Michigan Avenue
Saline, MI 48176
Clinton Township Regional Lending Center Phone: (734) 429-3828
45000 River Ridge Drive, Suite 110 Fax: (734) 429-9294
Clinton Township, MI 48038 Sara L. Simon, Senior Assistant Manager
Phone: (586) 416-0200
Fax: (586) 416-0220
Stephen C. Tarczy, Northeast Regional President Bank Operations Center
4000 Allen Road
Allen Park, MI 48101
Phone: (313) 381-3200
Fax: (313) 381-6100
69
DEARBORN BANCORP, INC. COMMON STOCK
Dearborn Bancorp, Inc. common stock is listed on the Nasdaq Stock Market and is
traded under the symbol "DEAR".
INVESTOR RELATIONS AND FORM 10-K AVAILABLE
Additional information about the Corporation including a free copy of the
Corporation's Form 10-K filed with the Securities and Exchange Commission may be
obtained by writing or calling: Carolyn Wilkins, Corporate Services Officer,
4000 Allen Road, Allen Park, Michigan 48101; (313) 381-3200 or by E-mail at
Carolyn.Wilkins@cbdear.com.
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on Tuesday, May 17, 2005, at
Park Place, 23400 Park Avenue, Dearborn, Michigan, at 4:00 p.m.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Crowe Chizek & Company LLC
55 Campau Avenue, N.W., Suite 300
Grand Rapids, Michigan 49503
(616) 774-0774
STOCK TRANSFER AGENT AND REGISTRAR
Stockholders requiring a change of name, address or ownership of stock, as well
as information about shareholder records or lost or stolen certificates,
dividend checks, dividend direct deposit, and dividend reinvestment should
contact:
Computershare Investor Services, LLC
2 North Lasalle Street
Chicago, Illinois 60602
(888) 294-8217
www.computershare.com
WEBSITE INFORMATION
Online Information for the most current news releases and Dearborn Bancorp, Inc.
financial reports and product information, visit our Website at www.cbdear.com
70
QUARTERLY COMMON STOCK PRICE INFORMATION
High Low Close
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2004
First quarter $ 22.36 $ 17.51 $ 19.96
Second quarter 23.70 23.26 23.55
Third quarter 28.07 24.05 19.91
Fourth quarter 30.00 24.76 29.16
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2003
First quarter $ 16.04 $ 12.83 $ 13.81
Second quarter 16.03 15.62 15.85
Third quarter 18.15 17.81 17.98
Fourth quarter 17.70 17.48 17.60
All per share amounts presented have been adjusted to reflect the issuance
of stock dividends.
PRINCIPAL MARKET MAKERS
Citigroup Global Markets, Inc. Oppenheimer & Co, Inc.
388 Greenwich St. 125 Broad Street
New York, NY 10013 New York, NY 10004
(212) 816-6000 (212) 668-8000
FIG Partners, LLC Raymond James & Associates, Inc.
1545 Peachtree Street, Suite 650 880 Carillon Parkway
Atlanta, GA 30309 St. Petersburg, FL 33716
(404) 601-7200 (727) 567-1000
Hill Thompson Magid, & Co. Sandler, O'Neill & Partners
15 Exchange Place, Suite 800 919 Third Avenue, 6th Floor
Jersey City, NJ 07302 New York, NY 10022
(201) 434-6900 (212) 466-7800
Howe Barnes Investments, Inc. Susquehanna Capital Group
222 S. Riverside Plaza 401 City Avenue, Suite 220
Chicago, Illinois 60606 Bala Cynwyd, PA 19004
(312) 655-3000 (610) 617-2600
Knight Equity Markets, L.P. Trident Securities
525 Washington Boulevard 4300 Six Forks Road, Suite 710
Jersey City, NJ 07310 Raleigh, NC 27609
(201) 222-9400 (919) 781-8900
USB Capital Markets, L.P.
111 Pavonia Avenue
Jersey City, NJ 07310
(201) 963-9100
71
[DEAR NASDAQ LISTED LOGO]
DEARBORN BANCORP, INC.
1360 Porter Street
Dearborn, Michigan 48124
Phone: (313) 565-5700
www.cbdear.com