EXHIBIT 13.
[DEARBORN BANCORP INC. LOGO]
and its subsidiary
[COMMUNITY BANK LOGO]
OF DEARBORN
---------------------
2005
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.................................... 7
Report of Independent Auditors........................................ 9
Consolidated Balance Sheets........................................... 12
Consolidated Statements of Income..................................... 13
Consolidated Statements of Changes in Stockholders' Equity............ 14
Consolidated Statements of Cash Flows................................. 16
Notes to Consolidated Financial Statements............................ 18
Management's Discussion and Analysis.................................. 45
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.
In 2005, the Bank introduced its website, www.cbdear.com, with online banking
capabilities to the public. The Bank's customers are able to execute transfers
to their accounts and view their account information and transactions.
Commercial customers have the option of utilizing the cash management module.
This feature enables commercial customers to designate multiple users, initiate
wire transfers, process ACH transactions, perform stop payments, and process
federal tax payments. During its first year of operation, over 1,000 users have
signed up for online banking. The website also contains product information
regarding the Bank's loan and deposit products and the Corporation's most recent
financial information.
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:
During 2005, we shifted emphasis from seeking rapid growth to improving
profitability. For much of our corporate history, we have, of necessity, placed
the highest priority on expanding both our deposit base and our geographic
footprint in Southeast Michigan. This was the only way that we could make the
transition from a start-up enterprise to an established financial institution.
With our continued expansion into Oakland, Macomb and Washtenaw Counties,
we have been able to turn much of our focus to improving the profitability of
Community Bank. For the most part, this involved generating quality loans as our
primary goal and then seeking the deposits and other liabilities needed to fund
them. Earlier in our history, we were not as well established that we could be
as certain of obtaining all the funding we needed at competitive cost as we are
today.
As our financial performance in 2005 demonstrates, this new confidence in
our ability to acquire funds on demand has made a marked difference in the
profitability of our Corporation. Net income for the 12 months ended December
31, 2005, was $7,510,000. This figure was 36.3 percent more than 2004 earnings
of $5,509,000. Because of our successful stock offering in mid-year, 2004, fully
diluted earnings per share of $1.32 for all of 2005 are not directly comparable
with diluted earnings per share of $1.16 in 2004.
Reflecting the change in our approach to building our business, total
assets went up 8.25 percent during 2005 to stand at $706,497,000 as the year
ended. They had been $652,662,000 one year earlier. Over the course of the year,
total deposits increased 7.7 percent to $582,438,000 from $540,880,000 at the
end of 2004. Total loans, however, grew by 11.8 percent. They were $657,037,000
on December 31, 2005, while they had been $587,562,000 twelve months earlier.
Earnings for the full year as well as assets, deposits and loans at
year-end all established new records for our Corporation. Stockholders' equity
was also at record levels. It was $84,213,000 at the end of the year, 12.9
percent more than it had been one year earlier when it was $74,604,000. By every
standard, our capital position is far in excess of that required by the federal
banking regulators of organizations such as ours.
The return on average assets was 1.08 percent, comfortably above the 1.00
percent "standard of excellence" for which we strive. Our return on average
equity of 9.44 percent is still not at our long-term goal of 15 percent but this
is largely a matter of leverage, which we approach cautiously to avoid undue
risk at this stage of our corporate history.
It should also be noted that during the Second Quarter of 2005, we
recognized a $696,000 decline in the fair market value of 80,000 shares of
Federal Home Loan Mortgage Corporation preferred stock that we purchased in
2001. At the time, we anticipated continuing to hold these securities in our
investment portfolio. Further changes in the mortgage market and continued
uncertainty about the regulation of this government sponsored enterprise led us
to sell the preferred shares later in the year.
Although we have continued our loan expansion, we have not compromised our
credit quality standards in order to attract new business. During 2005, our net
loan charge-offs were just $157,000 or 0.02 percent of total loans. Moreover, at
the end of the year, our total nonperforming assets were only $1,836,000, less
than 0.3 percent of total loans. This included $663,000 of real estate owned,
which was carried on our books at fair market value and is expected to be sold
during 2006. The allowance for loan losses was $6,808,000 or 1.04 percent of
total loans at December 31, 2005.
4
During recent years, we were fairly aggressive residential mortgage
lenders and our mortgage banking activities made a meaningful contribution of
our overall profitability. The end of the refinancing "boom" and gradually
rising long-term interest rates, however, have resulted in a marked decline in
mortgage lending volume. Today, we still consider ourselves "active" mortgage
lenders but we have greatly reduced the fixed overhead devoted to the support of
retail mortgage lending. As a consequence, we have kept these market changes
from having a major impact on our profitability.
As we have scaled back residential lending, we have placed greater
emphasis on commercial real estate mortgage and construction lending. Because
the yields on these loans tend to make them an advantageous use of funds, this
transition has had a very positive effect on our profitability.
This increased emphasis on commercial real estate lending has helped us
deal with the disappearing difference between short-term and long-term interest
rates that has taken place over the past 18 months. The Federal Reserve Open
Market Policy Committee had repeatedly raised short-term interest rates during
that time. Long-term rates, however, which are increasingly set in the global
money markets, have not experienced a corresponding increase. This diminishing
"yield curve" has had a significant impact on the profitability of most
community banking organizations. Traditionally, they have "borrowed" funds at
short-term rates from their depositors and profitably employed them in loans and
investments at long-term rates. Today, this is very hard to do and many of these
institutions are reporting declines in earnings.
On the other hand, our strategy of seeking commercial loans paying higher
interest rates has allowed us to keep a profitable spread between our cost of
funds and the yields on our loans. It is the primary reason why our net interest
income after provision for loan losses was 38.9 percent higher in 2005 than it
was in 2004.
The economic problems facing the Detroit metropolitan area and the rest of
southeast Michigan are well known. There is no denying a problem exists. In the
midst of an automotive depression, however, there are still many pockets of
prosperity in our market area. Our task is to identify those sectors of the
economy where business is still good and profitable and then solicit deposits
and loans from the people and business organizations to be found there.
Our financial results suggest that we have been successful in this
endeavor. In the midst of bad news, it is easy to forget that southeast Michigan
is still the tenth largest market for financial services in the United States.
The deposit totals at all financial institutions, excluding credit unions, in
the four counties we have offices are in excess of $77 billion. We currently
hold less than one percent of those deposits. For that reason, we do not let the
problems we see around us cloud our vision of further growth and greater
profitability for our Corporation in the years to come.
5
Beyond the size of the markets where we do business, there are two other
factors that suggest our long-term aspirations are quite realistic. The first is
the fact that we have acquired the infrastructure, both in terms of facilities
and, more important, people, that will allow us to grow at a reasonably rapid
rate for some time without commensurate increases in overhead. Our present staff
can handle an appreciably greater volume of business in our current locations
without any deterioration in the high quality customer service that has been a
key ingredient in our success to date.
Moreover, we have plenty of capital available to support both internal
growth and expansion through acquisitions. A case could be made that we now have
"too much" capital. Experienced bankers, however, know that there is no such
thing as "too much" capital. It is organizations with the strongest capital
positions that are best able to seize attractive opportunities as they arise.
Our senior officers and directors are constantly on the alert for potential
branch sites and possible mergers or acquisitions. We are also in regular
contact with several investment banking firms that know of our keen interest in
having prospective transactions brought to our attention.
It is within the context of the foregoing background that the directors
and senior officers of our Corporation anticipate compounding our past progress
in 2006 and the years beyond. Obviously, our growth rates by percentage will
decline as we grow, but we expect to be larger and more profitable at this time
next year and we see no impediments to continuing success in the foreseeable
future. We are pleased with what we have accomplished and look forward to
serving our stockholders in the future as we have done in the past.
It would not be appropriate to close this Annual Report letter without
noting the passing in January, 2006, of our Vice Chairman, Richard Nordstrom.
Dick was one of the incorporators of Dearborn Bancorp, Inc., and had been a
director of both the holding company and Community Bank since we commenced
operations. He was a successful businessman and a distinguished architect who
made numerous contributions to the success of our Corporation over the years.
The directors and senior officers who knew him well will miss him, and everyone
associated with our organization extends our sincere condolences to Dick's
family.
Our Annual Meeting will be held at Park Place in Dearborn on Tuesday May
16, 2006 at 4:00pm. We hope that you will be able to attend in person. In
addition, we look forward to reporting on our business in greater detail,
hearing your comments and suggestions and responding to your questions.
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, 2005 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, 2005 and 2004,
and the Consolidated Statements of Income for the years ended December 31, 2005,
2004 and 2003 are included elsewhere in this Annual Report.
(In thousands, except share and per share data) 2005 2004 2003 2002 2001
----------- ---------- ---------- ---------- -----------
OPERATIONS
Interest income $ 43,855 $ 29,790 $ 23,564 $ 18,259 $ 14,585
Interest expense 16,403 9,409 8,631 7,505 7,405
----------- ---------- ---------- ---------- -----------
Net interest income 27,452 20,381 14,933 10,754 7,180
Provision for loan losses 1,081 1,400 1,699 1,052 920
----------- ---------- ---------- ---------- -----------
Net interest income after provision for loan
losses 26,371 18,981 13,234 9,702 6,260
Total non-interest income 722 1,332 2,829 1,674 1,460
Total non-interest expense 15,716 11,967 10,735 7,372 5,379
----------- ---------- ---------- ---------- -----------
Income before federal income tax expense 11,377 8,346 5,328 4,004 2,341
Income tax expense 3,867 2,837 1,807 1,357 802
----------- ---------- ---------- ---------- -----------
Net income $ 7,510 $ 5,509 $ 3,521 $ 2,647 $ 1,539
=========== ========== ========== ========== ===========
FINANCIAL CONDITION
Total assets $ 706,497 $ 652,662 $ 446,075 $ 325,100 $ 226,865
Mortgage loans held for sale 1,041 1,692 1,505 9,852 2,915
Investment securities, available for sale 17,153 21,075 16,948 22,216 21,652
Federal Home Loan Bank stock 1,293 1,122 1,073 1,033 1,000
Loans 657,037 587,562 400,958 267,522 180,892
Allowance for loan losses (6,808) (5,884) (4,314) (2,875) (1,922)
Other assets 36,781 26,226 8,757 7,902 6,454
Deposits 582,438 540,880 379,619 262,086 177,481
Federal Home Loan Bank advances 25,588 20,614 20,638 20,660 20,000
Subordinated debentures 10,000 10,000 10,000 10,000 --
Other borrowings 1,615 4,115 -- -- --
Other liabilities 2,643 2,449 1,217 1,663 1,481
Stockholders' equity 84,213 74,604 34,601 30,691 27,903
PER SHARE INFORMATION (1)
Net income per common share - basic $ 1.40 $ 1.27 $ 0.99 $ 0.76 $ 0.43
Net income per common share - diluted $ 1.32 $ 1.16 $ 0.91 $ 0.72 $ 0.42
Book value per common share $ 15.53 $ 14.12 $ 9.68 $ 8.76 $ 7.64
Average shares outstanding - basic 5,352,709 4,324,223 3,544,534 3,484,262 3,604,774
Average shares outstanding - diluted 5,702,764 4,732,011 3,851,752 3,662,859 3,680,509
Shares outstanding at end of period 5,423,556 5,285,096 3,576,215 3,502,832 3,652,228
OTHER DATA
Return on average assets 1.08% 1.05% 0.89% 0.93% 0.76%
Return on average equity 9.44% 10.56% 10.80% 9.08% 5.46%
Net interest margin 4.14% 4.04% 3.97% 3.94% 3.76%
Net interest spread 3.62% 3.69% 3.63% 3.37% 2.91%
Allowance for loan losses to total loans 1.04% 1.00% 1.08% 1.07% 1.06%
Nonperforming assets to total assets 0.26% 0.47% 0.42% 0.84% 0.35%
Stockholders' equity to total assets 11.92% 11.43% 7.76% 9.44% 12.30%
Total interest expense to gross interest income 37.40% 31.58% 36.63% 41.10% 50.77%
Number of offices 12 12 8 6 5
(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 2005, the Bank provided the following local organizations with
financial support or personal involvement:
99 Huskies Dearborn Rotary Club
Agape Christian Academy, Canton Dearborn Senior Center
American Arab Chamber of Commerce Dearborn Symphony Orchestra
American Red Cross Dexter Area Chamber of Commerce
Ann Arbor Chamber of Commerce Downriver Senior Olympics
Ann Arbor Summer Festival Festival of Trees
Ann Arbor Symphony Orchestra Garden City Hospital Foundation
Auburn Hills Chamber of Commerce Garden Club of Dearborn
Canton Chamber of Commerce Goodwill Industries of Greater Detroit
Canton Community Foundation Henry Ford Community College Foundation
Canton Exchange Club Holiday on the Avenue, Dearborn
Canton Liberty Festival Junior League Goodwill
Canton Lion's Club Lakeland Broncos
Canton Senior Safety Coalition Mike Adray Memorial Foundation
Canton Senior Center New Morning School
Central Macomb Chamber of Commerce North Oakland Baseball Federation
Clinton Township Senior Expo Oakwood Health Care Foundation
Dearborn Baseball Orchestra Canton
Dearborn Board of Realtors Plymouth Chamber of Commerce
Dearborn Chamber of Commerce Plymouth Community Arts Center
Dearborn Community Arts Council Royal Oak Police
Dearborn Elderfest Saint Joseph Mercy Saline Hospital
Dearborn Exchange Club Saline Area Chamber of Commerce
Dearborn Goodfellows Saline Celtic Festival
Dearborn Heights Chamber of Commerce Showcase Plymouth
Dearborn Heights Lions Club Sig Krug Memorial Foundation
Dearborn Heights Park & Recreation Southern Wayne County Chamber of Commerce
Dearborn Heights Spirit Festival St. Joseph Hospital
Dearborn Homecoming Trenton Rotary Club
Dearborn Kiwanis Turning Point
Dearborn Optimist Club Washtenaw Development Council
Dearborn Outer Drive Kiwanis Washtenaw Housing Alliance
Dearborn Police Officers Charity Washtenaw United Way
Wayne County Treasurers Association
Western Wayne Association of Realtors
Westland Foundation
Wyandotte Catholic Consolidated School
Ypsilanti Chamber of Commerce
YWCA of Western Wayne County
8
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, 2005 and 2004, 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, 2005. 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, 2005 and 2004, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2005, in conformity with U. S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Dearborn
Bancorp, Inc.'s internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated March 8, 2006 expressed an unqualified opinion
thereon.
Crowe Chizek and Company LLC
Grand Rapids, Michigan
March 8, 2006
9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Dearborn Bancorp, Inc.
Dearborn, Michigan
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Dearborn
Bancorp, Inc. maintained effective internal control over financial reporting as
of December 31, 2005, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Dearborn Bancorp, Inc.'s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit
We conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Dearborn Bancorp, Inc. maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also in our opinion, Dearborn
Bancorp, Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2005, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements of Dearborn Bancorp, Inc. and our report dated March 8, 2006
expressed an unqualified opinion on those consolidated financial statements.
Crowe Chizek and Company LLC
Grand Rapids, Michigan
March 8, 2006
10
REPORT BY DEARBORN BANCORP, INC. AND SUBSIDIARY
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective system
of internal control over financial reporting presented in conformity with
generally accepted accounting principles. There are inherent limitations in the
effectiveness of any system of internal control. Accordingly, even an effective
system of internal control can provide only reasonable assurance with respect to
financial statement preparation.
Management assessed the Company's systems of internal control over financial
reporting presented in conformity with generally accepted accounting principles
as of December 31, 2005. This assessment was based on criteria for effective
internal control over financial reporting described in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management believes that, as of
December 31, 2005, Dearborn Bancorp, Inc. maintained effective control over
financial reporting presented in conformity with generally accepted accounting
principles based on those criteria.
The Company's independent auditors have issued an audit report on our assessment
of the Company's internal control over financial reporting.
Dearborn Bancorp, Inc. and Subsidiary
/s/ Michael J. Ross
- ---------------------------------------
Michael J. Ross.
President and Chief Executive Officer
/s/ Jeffery L. Karafa
- ---------------------------------------
Jeffery L. Karafa
Vice President, Treasurer and Secretary
11
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------
(Dollars, in thousands) 2005 2004
---------- ----------
ASSETS
Cash and cash equivalents
Cash and due from banks $ 7,118 $ 5,946
Federal funds sold 2,268 12,640
Interest bearing deposits with banks 69 2,283
---------- ----------
Total cash and cash equivalents 9,455 20,869
Mortgage loans held for sale 1,041 1,692
Securities, available for sale 17,153 21,075
Federal Home Loan Bank stock 1,293 1,122
Loans
Loans 657,037 587,562
Allowance for loan losses (6,808) (5,884)
---------- ----------
Net loans 650,229 581,678
Bank premises and equipment, net 13,792 13,124
Real estate owned 663 138
Goodwill 5,473 7,080
Other intangible assets 2,291 902
Accrued interest receivable 2,586 1,889
Other assets 2,521 3,093
---------- ----------
Total assets $ 706,497 $ 652,662
========== ==========
LIABILITIES
Deposits
Non-interest bearing deposits $ 59,652 $ 63,065
Interest bearing deposits 522,786 477,815
---------- ----------
Total deposits 582,438 540,880
Other liabilities
Securities sold under agreements to repurchase 1,615 4,115
Federal Home Loan Bank advances 25,588 20,614
Other liabilities 960 1,342
Accrued interest payable 1,683 1,107
Subordinated debentures 10,000 10,000
---------- ----------
Total liabilities 622,284 578,058
STOCKHOLDERS' EQUITY
Common stock - no par value 10,000,000 shares
authorized, 5,423,556 and 5,285,096 shares
outstanding in 2005 and 2004, respectively 83,944 74,918
Unearned restricted stock awards (260) --
Retained earnings 573 344
Accumulated other comprehensive (loss) (44) (658)
---------- ----------
Total stockholders' equity 84,213 74,604
---------- ----------
Total liabilities and stockholders' equity $ 706,497 $ 652,662
========== ==========
The accompanying notes are an integral part of these consolidated statements.
12
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
------------------------------------
(In thousands, except share data) 2005 2004 2003
---------- ---------- ----------
Interest income
Interest on loans $ 42,904 $ 29,040 $ 22,764
Interest on securities, available for sale 598 460 522
Interest on deposits with banks 111 129 153
Interest on federal funds 242 161 125
---------- ---------- ----------
Total interest income 43,855 29,790 23,564
Interest expense
Interest on deposits 14,427 8,013 7,212
Interest on other liabilities 1,976 1,396 1,419
---------- ---------- ----------
Total interest expense 16,403 9,409 8,631
Net interest income 27,452 20,381 14,933
Provision for loan losses 1,081 1,400 1,699
---------- ---------- ----------
Net interest income after provision for loan losses 26,371 18,981 13,234
---------- ---------- ----------
Non-interest income
Service charges on deposit accounts 639 569 459
Fees for other services to customers 79 30 29
Gain on the sale of loans 578 674 2,130
Gain (loss) on the sale of investment securities (44) -- 89
Loss on the write-down of securities (696) -- --
Gain (loss) on the sale of real estate owned 92 (28) --
Other income 74 87 122
---------- ---------- ----------
Total non-interest income 722 1,332 2,829
Non-interest expenses
Salaries and employee benefits 9,366 7,722 6,231
Commissions on the origination of loans 217 267 912
Occupancy and equipment expense 2,528 1,582 1,377
Intangible expense 230 27 --
Advertising and marketing 384 336 279
Stationery and supplies 365 310 317
Professional services 929 436 338
Data processing 448 332 280
Other operating expenses 1,249 955 1,001
---------- ---------- ----------
Total non-interest expenses 15,716 11,967 10,735
---------- ---------- ----------
Income before federal income tax provision 11,377 8,346 5,328
Income tax provision 3,867 2,837 1,807
---------- ---------- ----------
Net income $ 7,510 $ 5,509 $ 3,521
========== ========== ==========
Per share data:
Net income - basic $ 1.40 $ 1.27 $ 0.99
Net income - diluted $ 1.32 $ 1.16 $ 0.91
Weighted average number of shares outstanding - basic 5,352,709 4,324,223 3,544,534
Weighted average number of shares outstanding - diluted 5,702,764 4,732,011 3,851,752
The accompanying notes are an integral part of these consolidated statements.
13
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2005, 2004 and 2003
Unearned Accumulated
Restricted Other Total
Common Stock Retained Comprehensive Stockholders'
(In thousands, except shares) Stock Awards Earnings Income Equity
-------- ----------- ---------- -------------- -------------
Balance, January 1, 2003 $ 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 available 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
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 -- -- -- (1,030) (1,030)
securities available for sale
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 CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2005, 2004 and 2003
Unearned Accumulated
Restricted Other Total
Common Stock Retained Comprehensive Stockholders'
Stock Awards Earnings Income Equity
--------- ------------- -------- -------------- -------------
Balance, January 1, 2005 $ 74,918 $ -- $ 344 $ (658) $ 74,604
Issuance of restricted stock awards 281 (281) -- -- --
Stock awards earned -- 21 -- -- 21
Stock options earned 10 -- -- -- 10
Exercise of stock options 1,028 -- -- -- 1,028
Tax effect of issuance of stock options 426 -- -- -- 426
Stock dividend #1 3,307 -- (3,307) -- --
Stock dividend #2 3,974 -- (3,974) -- --
Net income -- -- 7,510 -- 7,510
Other comprehensive income
Reclassification adjustment for losses
included in net income -- -- -- 740 740
Changes in net unrealized loss on
securities available for sale -- -- -- 190 190
-------------- -------------
Net change in net unrealized loss
on securities available for sale -- -- -- 930 930
Tax effects (316) (316)
-------------- -------------
Other comprehensive income -- -- -- 614 614
Total comprehensive income 8,124
--------- ------------- -------- -------------- -------------
Balance, December 31, 2005 $ 83,944 $ (260) $ 573 $ (44) $ 84,213
========= ============= ======== ============== =============
The accompanying notes are an integral part of these consolidated statements.
15
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------------------
(In thousands) 2005 2004 2003
----------- ----------- ----------
Cash flows from operating activities
Interest and fees received $ 42,710 $ 29,101 $ 22,243
Interest paid (15,827) (8,604) (8,486)
Proceeds from sale of mortgages held for sale 37,556 42,320 139,721
Origination of mortgages held for sale (36,446) (41,974) (129,244)
Taxes paid (3,400) (2,435) (2,560)
Gain (loss) on sale of real estate owned 92 (28) --
Cash paid to suppliers and employees (13,829) (10,958) (8,654)
----------- ----------- ----------
Net cash provided by operating activities 10,856 7,422 13,020
Cash flows from investing activities
Proceeds from the sale of securities available for sale 3,260 -- 6,199
Proceeds from calls, maturities and repayments of securities 12,357 40,886 20,636
Purchases of securities available for sale (11,496) (45,991) (21,622)
Purchase of Federal Home Loan Bank stock (171) (49) (40)
Increase in loans, net of payments received (69,632) (119,769) (133,696)
Purchases of property and equipment (1,648) (7,513) (757)
Net cash paid in Bank of Washtenaw acquisition -- (5,010) --
----------- ----------- ----------
Net cash used in investing activities (67,330) (137,446) (129,280)
Cash flows from financing activities
Net increase (decrease) in non-interest bearing deposits (3,413) (3,649) 6,625
Net increase in interest bearing deposits 44,971 98,637 110,908
Increase (decrease) in other borrowings (2,500) 125 --
Proceeds from Federal Home Loan Bank advances 5,000 -- --
Repayments of Federal Home Loan Bank advances (26) (24) (22)
Issuance of common stock -- 34,040 --
Exercise of stock options 1,028 616 447
----------- ----------- ----------
Net cash provided by financing activities 45,060 129,745 117,958
Increase (decrease) in cash and cash equivalents (11,414) (279) 1,698
Cash and cash equivalents at the beginning of the period 20,869 21,148 19,450
----------- ----------- ----------
Cash and cash equivalents at the end of the period $ 9,455 $ 20,869 $ 21,148
=========== =========== ==========
The accompanying notes are an integral part of these consolidated statements.
16
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31,
---------------------------------
(In thousands) 2005 2004 2003
--------- ---------- --------
Reconciliation of net income to net cash provided by operating activities
Net income $ 7,510 $ 5,509 $ 3,521
Adjustments to reconcile net income to net cash
Provided by operating activities
Provision for loan losses 1,081 1,400 1,699
Depreciation and amortization expense 980 556 478
Restricted stock award expense 31 -- --
Accretion of discount on investment securities (47) (71) (13)
Amortization of premium on investment securities 38 19 69
Amortization of intangible assets 230 27 --
(Increase) decrease in mortgages held for sale 651 (187) 8,347
Increase in interest receivable (697) (182) (201)
Increase (decrease) in interest payable 576 209 145
(Gain) loss on sale of securities available for sale 740 -- (89)
Increase in other assets (281) (883) (345)
Increase (decrease) in other liabilities 44 1,025 (591)
--------- ---------- --------
Net cash provided by operating activities $ 10,856 $ 7,422 $ 13,020
========= ========== ========
Supplemental noncash disclosures:
Transfers from loans to other real estate owned $ 1,850 $ 417 --
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.
17
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
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.
18
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
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. These loans are sold service released to other
entities.
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.
19
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
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.
20
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
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 and business relationship
intangible assets arising from a bank acquisition in 2004. They are
initially measured at fair value and are being amortized on an accelerated
method over their estimated useful lives.
Stock Compensation
The Corporation has two incentive stock plans. Employee compensation
expense under the 1994 Stock Option Plan is reported using the intrinsic
value method. No stock-based compensation cost from this plan is reflected
in net income, as all options granted had an exercise price 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).
2005 2004 2003
------- ------- -------
Net Income
As reported $ 7,510 $ 5,509 $ 3,521
Less: stock-based compensation expense
determined under fair value based method -- (9) (792)
------- ------- -------
Pro forma $ 7,510 $ 5,500 $ 2,729
Basic income per share
As reported $ 1.40 $ 1.27 $ 0.99
Pro forma $ 1.40 $ 1.27 $ 0.77
Diluted income per share
As reported $ 1.32 $ 1.16 $ 0.91
Pro forma $ 1.32 $ 1.16 $ 0.71
Employee compensation expense under the 2005 Long-Term Incentive Plan is
reported using the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock-based Compensation. Since stock-based
compensation cost is reflected in net income, there is no pro forma
effect.
21
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. The impact of options granted during 2005 were
reflected in net income and do not have any pro forma effects. All per
share amounts have been adjusted for stock dividends.
2003
-------
Risk-free interest rate 3.55%
Expected option life 7 years
Dividend yield 0.00%
Expected volatility of stock price 25.55%
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.
22
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 $3,980,000 and $5,166,000 of cash on
hand or on deposit with the Federal Reserve Bank to meet regulatory
reserve and clearing requirements at year end 2005 and 2004, respectively.
These balances do not earn interest.
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.
Effect of Newly Issued But Not Yet Effective Accounting Standards:
FAS 123, Revised, requires companies to record compensation cost for stock
options provided to employees in return for employment service. The cost
is measured at the fair value of the options when granted, and this cost
is expensed over the employment service period, which is normally the
vesting period of the options. This will apply to awards granted or
modified in fiscal years beginning in 2006. The effect on results of
operations will depend on the level of future option grants and the
calculation of the fair value of the options granted at such future date,
as well as the vesting periods provided, and so cannot currently be
predicted. Options granted under the 2005 Long Term Incentive Plan are
"variable", as defined by FAS 123. Upon adoption of FAS 123, Revised, the
fair value of these options at their grant date will be expensed over the
remaining service period. This is expected to result in additional
compensation expense of approximately $49,000, $49,000 and $24,000 in
2006, 2007 and 2008, respectively. Any income tax benefit for the exercise
of stock options in excess of income tax expense for financial reporting
purposes will be classified as a cash inflow for financing activities and
a cash outflow for operating activities in the statement of cash flows.
23
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
NOTE B - SECURITIES AVAILABLE FOR SALE
The amortized cost and fair value for securities available for sale and
the unrealized gains and losses recognized as accumulated other
comprehensive income were as follows (in thousands):
December 31, 2005
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ---------
US Treasury securities $ 16,665 $ -- $ (68) $ 16,597
Mortgage backed securities 555 2 (1) 556
----------- ---------- ---------- ---------
Totals $ 17,220 $ 2 $ (69) $ 17,153
=========== ========== ========== =========
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
========= ========== ========== ========
The amortized cost and fair value of securities available for sale at
December 31, 2005 by contractual maturity are shown below (in thousands).
Securities not due at a single maturity date, such as mortgage backed
securities are shown separately.
Amortized Fair
Cost Value
--------- ---------
Due in three months or less $ 5,700 $ 5,687
Due in three months through one year 6,983 6,936
Due in one year through five years 3,982 3,974
Due in greater than five years -- --
Mortgage backed securities 555 556
--------- ---------
Totals $ 17,220 $ 17,153
========= =========
24
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
NOTE B - SECURITIES AVAILABLE FOR SALE (Continued)
Sales of available for sale securities for the years ended December 31,
are as follows (in thousands):
2005 2004 2003
------ ----- ------
Proceeds $3,260 $ -- $6,199
Gross gains -- -- 89
Gross losses 740 -- --
Securities having a carrying value of $4,524,000 and $5,859,000 at
December 31, 2005 and 2004, 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 2005 and 2004, aggregated by
investment category and length of time that individual securities have
been in a continuous unrealized loss position, are as follows:
December 31, 2005
--------------------------------------------------------------
Less than one year One year or more Total
------------------- ------------------ -------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
------- ---------- ------ ---------- ------- ----------
US treasury securities $ 9,945 $ (21) $6,652 $ (47) $16,597 $ (68)
Mortgage backed securities 197 (1) -- -- 197 (1)
------- ---------- ------ ---------- ------- ----------
Total temporarily impaired $10,142 $ (22) $6,652 $ (47) $16,794 $ (69)
======= ========== ====== ========== ======= ==========
December 31, 2004
--------------------------------------------------------------
Less than one year One year or more Total
------------------- ------------------ -------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
------- ---------- ------ ---------- ------- ----------
US treasury securities $15,640 $ (62) $ -- $ -- $15,640 $ (62)
FHLMC preferred stock 3,040 (960) -- -- 3,040 (960)
------- ---------- ------ ---------- ------- ----------
Total $18,680 $ (1,022) $ -- $ -- $18,680 $ (1,022)
======= ========== ====== ========== ======= ==========
25
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
NOTE B - SECURITIES AVAILABLE FOR SALE (Continued)
Unrealized losses on securities, available for sale at December 31, 2005
have not been recognized 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 believed to
be largely due to changes in interest rates. The fair value is expected to
recover as the bonds approach their maturity date. Unrealized losses on
securities, available for sale at December 31, 2004 included a single
issue of FHLMC preferred stock with an unrealized loss of $960,000.
Management expected the market value of this security to recover after its
coupon rate repriced on April 1, 2005. When it became apparent that this
security would not sufficiently recover, the Corporation recorded an
"Other Than Temporary Loss" of $696,000 on this security. The Corporation
recorded an additional loss of $44,000 as a result of the sale of the
security on July 22, 2005.
NOTE C - LOANS, NET
Major categories of loans included in the portfolio at December 31 are as
follows (in thousands):
December 31, December 31, Percent
2005 2004 Incr(decr)
------------ ------------ ------------
Consumer loans $ 35,041 $ 42,149 (16.86%)
Commercial, financial, & other 130,750 129,103 1.28%
Commercial real estate construction 107,292 70,182 52.88%
Commercial real estate mortgages 336,657 296,934 13.38%
Residential real estate mortgages 47,297 49,194 (3.86%)
------------ ------------ ------------
657,037 587,562 11.82%
============
Allowance for loan losses (6,808) (5,884)
------------ ------------
$ 650,229 $ 581,678
============ ============
Certain directors and executive officers of the Corporation, including
their related interests, were loan customers of the Bank during 2005 and
2004. These loan transactions for the years ended December 31, are as
follows (in thousands):
2005 2004
------- -------
Balance, beginning of year $ 4,150 $ 3,691
New loans during period 970 1,080
Repayments made during period (2,363) (621)
------- -------
Balance, end of period $ 2,757 $ 4,150
======= =======
26
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
NOTE C - LOANS, NET (Continued)
Activity in the allowance for loan losses for the years ended December 31
are as follows (in thousands):
2005 2004 2003
------ ------ ------
Balance, beginning of year $5,884 $4,314 $2,875
Allowance on loans acquired -- 184 --
Charge-offs:
Consumer loans 112 31 38
Commercial, financial & other 169 -- 141
Commercial real estate construction -- -- 50
Commercial real estate mortgages 86 -- 124
Residential real estate mortgages -- 100 --
Recoveries:
Consumer loans 37 12 13
Commercial, financial & other 131 44 30
Commercial real estate construction -- -- 50
Commercial real estate mortgages 10 61 --
Residential real estate mortgages 32 -- --
------ ------ ------
Net charge-offs 157 14 260
Additions charged to operations 1,081 1,400 1,699
------ ------ ------
Balance at end of period $6,808 $5,884 $4,314
====== ====== ======
27
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
NOTE C - LOANS, NET (Continued)
The aggregate balances in impaired loans at December 31, are as follows
(in thousands):
2005 2004
---- ------
Impaired loans with no allocated allowance for loan losses $341 $ --
Impaired loans with allocated allowance for loan losses 200 1,965
---- ------
Total $541 $1,965
==== ======
Amount of the allowance for loan loss allocated $ 69 $295
Average of impaired loans during the year $940 $1,412
Interest income recognized during impairment $ -- $ 10
Cash-basis interest income recognized $ -- $ 10
Non-performing assets were as follows (in thousands):
2005 2004 2003
------- ------ ------
Troubled debt restructuring $ -- $ -- $ --
Over 90 days past due 189 143 19
Non-accrual loans 984 2,956 2,056
------- ------ ------
Total non-performing loans 1,173 3,099 2,075
Real estate owned 661 136 --
Other repossessed assets 2 2 --
------- ------ ------
Other non-performing assets 663 138 --
Total non-performing assets $ 1,836 $3,237 $2,075
======= ====== ======
Non-performing loans and impaired loans are defined differently.
Non-performing loans includes both smaller balance homogeneous loans that
are collectively evaluated for impairment and individually classified
impaired loans.
28
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment are comprised of the following at December 31 (in
thousands):
2005 2004
------- -------
Land and improvements $ 3,232 $ 1,641
Building and improvements 10,214 11,220
Furniture and equipment 5,366 4,362
------- -------
18,812 17,223
Less accumulated depreciation 5,020 4,099
------- -------
Totals $13,792 $13,124
======= =======
Depreciation expense for 2005, 2004 and 2003 amounted to $980,000,
$556,000, and $478,000, respectively. During 2005, the Corporation made
capital expenditures of $1,664,000. The expenditures were primarily due to
expansion and renovation of two branch offices, a new phone system and
other improvements in technology.
Rent expense for facilities of $617,000, $678,000 and $445,000 was
incurred during 2005, 2004 and 2003, respectively. Rental commitments
under noncancellable operating leases are as follows, before considering
renewal options that generally are present (in thousands):
2006 $ 620
2007 489
2008 446
2009 444
2010 374
Thereafter 297
------
Totals $2,670
======
29
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
NOTE E - GOODWILL AND OTHER INTANGIBLE ASSETS
As a result of the acquisition of the Bank of Washtenaw in October of
2004, the Corporation acquired goodwill and other intangible assets. At
year-end 2004, the Corporation had identified a core deposit intangible of
$929,000 and amortized $27,000 of expense. During 2005, the valuation of
the borrower relationship intangible was completed and that amount was
separated from goodwill and a $12,000 final adjustment was made to the
initial goodwill estimate. Goodwill amounted to $5,473,000 and there was
no impairment of that goodwill during 2005.
Other intangible assets were as follows (in thousands):
2005
----------------------
Gross
Carrying Accumulated
Amount Amortization
-------- ------------
Amortized intangible assets
Core deposit intangible $ 929 $ 181
Borrower relationship intangible 1,620 77
-------- ------------
Total $ 2,549 $ 258
======== ============
The core deposit intangible is amortized over 10 years and the borrower
relationship intangible is amortized over 17 years. Estimated amortization
expense for each of the next five years is as follows (in thousands):
Amortization
------------
2006 $ 251
2007 257
2008 249
2009 249
2010 216
30
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
NOTE F - DEPOSITS
Time deposits of $100,000 or more were $262,318,000 and $199,237,000 at
December 31, 2005 and 2004, respectively. Time deposits of $100,000 or
more from governmental units, which are included in total time deposits of
$100,000 or more were $85,237,000 and $71,058,000 at December 31, 2005 and
2004, respectively.
Scheduled maturities of time deposits at December 31, 2005 are listed in
the following table (in thousands):
$100,000 and over Less than $100,000 Total
----------------- ------------------ -----------
2006 $ 199,322 $ 110,304 $ 309,626
2007 37,983 31,393 69,376
2008 13,839 4,020 17,859
2009 3,359 2,756 6,115
2010 7,815 2,565 10,380
----------------- ------------------ -----------
Totals $ 262,318 $ 151,038 $ 413,356
================= ================== ===========
Related party deposits from directors and executive officers of the
Corporation were approximately $8,768,000 and $6,546,000 at December 31,
2005 and 2004, 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 $4.0 million and
$5.0 million at December 31, 2005 and 2004, respectively.
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):
2005 2004
------ ------
Balance at year-end $1,615 $4,115
Average daily balance during the year $2,995 $ 739
Average interest rate during the year 1.25% 1.25%
Maximum month-end balance during year $4,565 $4,115
Weighted average interest rate at year-end 1.25% 1.25%
31
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
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 $25,588,000 and
$20,614,000 at December 31, 2005 and 2004, 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 $40,480,000 and securities
available for sale in the amount of $544,000. Federal Home Loan Bank
advances are comprised of the following at December 31, 2005 (in
thousands):
Date Amount Rate Maturity Date
- ----- -------- ---- -------------
2001 $ 10,000 4.28% 2006
2001 5,000 4.54% 2007
2001 5,000 4.68% 2008
2002 588 4.01% 2007
2005 5,000 4.43% 2008
-------- ----
Total $ 25,588 4.43%
========
The Bank makes monthly interest payments with principal generally due at
maturity. Required principal payments at year-end 2005 are $10.0 million
in 2006, $5.6 million in 2007 and $10.0 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 $26.6 million based on collateral pledged
by the Bank at December 31, 2005.
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 7.50% at
December 31, 2005. 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.
32
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
NOTE J - INCOME TAXES
The federal tax provision consists of the following (in thousands):
2005 2004 2003
------ ------ ------
Current $4,330 $3,301 $2,216
Deferred (463) (464) (409)
------ ------ ------
$3,867 $2,837 $1,807
====== ====== ======
The details of the net deferred tax asset are as follows at December 31,
(in thousands):
2005 2004
------ ------
Deferred tax assets
Allowance for loan losses $2,226 $1,829
Deferred loan fees and costs 246 247
Unrealized losses on securities, available for sale 23 339
Capital loss 252 --
Other 28 116
------ ------
Total deferred tax assets 2,775 2,531
Deferred tax liabilities
Premises and equipment (271) (305)
Goodwill and other intangibles (138) (36)
Other (125) (96)
------ ------
Total deferred tax liabilities (534) (437)
------ ------
Net deferred tax asset $2,241 $2,094
====== ======
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 for tax purposes and are tax deductible,
but the goodwill is not being amortized for book purposes. During 2005, a
deferred tax asset of $252,000 was generated on the capital loss that
resulted from the sale of FHLMC preferred stock. The capital loss can be
carried forward through 2010 to offset capital gain income. An allowance
against the net tax deferred asset is not considered necessary at December
31, 2005.
33
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
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):
2005 2004
-------------------- --------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
Assets:
Cash and cash equivalents $ 9,455 $ 9,455 $ 20,869 $ 20,869
Mortgage loans held for sale 1,041 1,055 1,692 1,724
Securities, available for sale 17,153 17,153 21,075 21,075
Federal Home Loan Bank Stock 1,293 1,293 1,122 1,122
Loans, net 650,229 647,621 581,678 583,242
Accrued interest receivable 2,586 2,586 1,889 1,889
Liabilities:
Deposits $ 582,438 $ 582,629 $ 540,880 $ 542,401
Securities sold under agreements to
repurchase 1,615 1,615 4,115 4,115
Federal Home Loan Bank advances 25,588 26,002 20,614 20,991
Subordinated debentures 10,000 10,000 10,000 10,000
Accrued interest payable 1,683 1,683 1,107 1,107
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.
34
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
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 $186,729,000
and $115,504,000 at December 31, 2005 and 2004, respectively. Loan
commitments for variable rate loans were $167,474,000 and $113,324,000 at
December 31, 2005 and 2004, respectively. Loan commitments for fixed rate
loans were $19,255,000 and $2,180,000 at December 31, 2005 and 2004,
respectively. The fixed rate loan commitments at December 31, 2005 have
interest rates ranging from 4.47% to 13.25% 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, 2005
Commitments Period
-----------------------------------------------------------
Less than One to three Four to five Over five
one year years years years Totals
--------- ------------ ------------ ---------- --------
Home equity lines of credit $ 46 $ 225 $ 404 $ 19,193 $ 19,868
Residential loan commitments 4,227 -- -- -- 4,227
Standby letters of credit 2,159 5,839 992 -- 8,990
Commercial lines of credit 59,572 1,167 413 909 62,061
Other commercial commitments 57,862 21,697 3,411 8,613 91,583
--------- ------------ ------------ ---------- --------
Totals $ 123,866 $ 28,928 $ 5,220 $ 28,715 $186,729
========= ============ ============ ========== ========
At December 31, 2004
Commitments Period
-----------------------------------------------------------
Less than One to three Four to five Over five
one year years years years Totals
--------- ------------ ------------ ---------- --------
Home equity lines of credit $ 100 $ 196 $ 332 $ 21,235 $ 21,863
Residential loan commitments 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 commitments 29,037 11,885 299 $ 3,854 45,075
--------- ------------ ------------ ---------- --------
Totals $ 69,644 $ 16,488 $ 4,015 $ 25,357 $115,504
========= ============ ============ ========== ========
35
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
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
2005, 2004 and 2003, employer contributions were $148,000, $121,000 and
$124,000, 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, 2005 and 2004, 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).
36
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
NOTE M - REGULATORY MATTERS (Continued)
The following is a presentation of the Corporation's and Bank's regulatory
capital ratios (in thousands):
Minimum
Minimum To Be Well Capitalized
for Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
-------------- ----------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ------- -------- ------
As of December 31, 2005
Total capital
(to risk weighted assets)
Consolidated $93,281 13.29% $56,147 8.00% $ 70,184 10.00%
Bank 75,918 10.89% 55,756 8.00% 69,695 10.00%
Tier 1 capital
(to risk weighted assets)
Consolidated 86,472 12.32% 28,073 4.00% 42,110 6.00%
Bank 69,109 9.92% 27,878 4.00% 41,817 6.00%
Tier 1 capital
(to average assets)
Consolidated 86,472 12.32% 28,074 4.00% 35,092 5.00%
Bank 69,109 10.09% 27,400 4.00% 34,250 5.00%
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%
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 $18,300,000 in dividends to the parent company without prior
regulatory approval. No cash dividends have ever been paid by the Bank.
37
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
NOTE N - INCENTIVE STOCK PLANS
Incentive stock awards have been granted to officers and employees under
two Incentive Stock Plans. The first plan is the 1994 Stock Option Plan.
Options to buy common stock have been granted to officers and employees
under the 1994 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 in the 1994 Plan follows:
Weighted
Weighted Average Fair
Available Average Value of
for Options Exercise Options
Grant Outstanding Price Granted
----------- ----------- -------- ------------
Outstanding at January 1, 2003 138,809 618,671 $ 6.07
Forfeited 5,360 (5,360) 13.73
Granted (144,169) 144,169 13.82 $ 5.17
Exercised -- (73,374) 6.09
----------- ----------- --------
Outstanding at December 31, 2003 -- 684,106 7.64
Exercised -- (88,233) 7.83
----------- ----------- --------
Outstanding at December 31, 2004 -- 595,873 8.74
Exercised -- (126,816) 8.44
----------- ----------- --------
Outstanding at December 31, 2005 -- 469,057 $ 8.82
=========== =========== ========
Options outstanding under the 1994 Plan at December 31, 2005 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 - $9.41 353,336 4.8 years $ 7.01 353,336 $ 7.01
$10.31 - $16.15 115,721 7.1 years $ 14.35 115,721 $ 14.35
------- -------
Totals 469,057 5.3 years $ 8.82 469,057 $ 8.82
======= =======
At December 31, 2005, 2004 and 2003, 469,057, 595,873 and 684,106 options
were exercisable at weighted average exercise prices of $8.82, $8.74 and
$7.64 per share, respectively. On December 31, 2005, there were no shares
available for grant under the 1994 Plan.
38
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
NOTE N - INCENTIVE STOCK PLANS
During 2005, the Corporation initiated the 2005 Long-Term Incentive Plan.
Under this plan, up to 315,000 shares will be granted to officers and
employees of the Bank. This plan provides that stock awards may take the
form of any combination of options, restricted shares, restricted share
units or performance awards.
The administration of the plan, including the granting of awards and the
nature of those awards is determined by the Corporation's Compensation
Committee. In October of 2005, the Corporation's Board of Directors
approved grants of stock options and restricted stock. The awards have a
term of ten years and typically vest fully three years from the grant
date. In order for vesting to occur, the Corporation must meet certain
performance criteria. The expected compensation cost of the 2005 plan is
being calculated assuming the Corporation's attainment of "target"
performance goals over the vesting period of the options. The actual cost
of these awards could range from zero to 150% of the currently recorded
compensation cost, depending on the Corporation's performance.
Stock Options Granted - The incentive stock options were granted with
exercise prices equal to market prices on the day of grant. The weighted
average fair value of the options granted at grant date was $8.36. The
following assumptions were used to determine weighted average fair value
of the options granted at grant date:
2005
---------
Risk-free interest rate 4.39%
Expected option life 6.5 years
Dividend yield 0.00%
Expected volatility of stock price 25.09%
A summary of the plan's option activity during 2005 is as follows:
Weighted
Average
Number Exercise
of Shares Price
--------- ---------
Outstanding at January 1, 2005 --
Shares Granted - Stock Options 15,839 $ 22.96
--------- ---------
Outstanding at December 31, 2005 15,839 $ 22.96
=========
Options exercisable --
=========
During the twelve months ended December 31, 2005, the Corporation
recognized stock option compensation expense of $10,000. The stock options
vest on June 30, 2008. Compensation cost of $49,000, $49,000 and $24,000
is expected to be recognized during 2006, 2007 and 2008, respectively.
Restricted Stock Grants - Restricted stock totaling 11,649 shares were
granted to officers on October 12, 2005. The restricted stock vests on
June 30, 2008. Compensation cost of $21,000 was recognized during the
twelve months ended December 31, 2005. Compensation cost of $104,000,
$104,000 and $51,000 will be recognized during 2006, 2007 and 2008,
respectively.
39
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
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, 2005, 2004 and 2003 (in thousands, except share and per share
data):
2005 2004 2003
--------- --------- ---------
Basic
Net income $ 7,510 $ 5,509 $ 3,521
Weighted average common shares 5,352,709 4,324,223 3,544,534
Basic earnings per common share $ 1.40 $ 1.27 $ 0.99
Diluted
Net income $ 7,510 $ 5,509 $ 3,521
Weighted average common shares 5,352,709 4,324,223 3,544,534
outstanding for basic earnings per
common share
Add: Dilutive effects of assumed 350,055 407,788 307,218
exercise of stock options
Average shares and dilutive potential
common shares 5,702,764 4,732,011 3,851,752
Dilutive earnings per common share $ 1.32 $ 1.16 $ 0.91
There were no antidilutive shares in 2004 or 2005. Stock options of 4,862
shares of common stock were not considered in computing diluted earnings
per common share for 2003 because they were antidilutive. All share and
per share amounts have been adjusted for stock dividends.
40
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
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) 2005 2004
------- -------
ASSETS
Cash and cash equivalents $ 2,516 $ 5,390
Securities, available for sale 12,629 10,980
Investment in subsidiary 76,850 66,080
Other assets 2,074 2,134
------- -------
Total assets $94,069 $84,584
======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Other liabilities $ (144) $ (20)
Subordinated debentures 10,000 10,000
------- -------
Total liabilities 9,856 9,980
Stockholders' equity 84,213 74,604
------- -------
Total liabilities and stockholders' equity $94,069 $84,584
======= =======
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
------------------------
(In thousands) 2005 2004 2003
------ ------ ------
Interest income $ 447 $ 260 $ 121
Operating expenses 1,092 919 604
------ ------ ------
Loss before equity in undistributed
income of subsidiary (645) (659) (483)
Equity in undistributed income
of subsidiary 8,155 6,168 4,004
------ ------ ------
Net income $7,510 $5,509 $3,521
====== ====== ======
41
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
NOTE P - PARENT ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------
(In thousands) 2005 2004 2003
--------- -------- --------
Cash flows from operating activities
Net income $ 7,510 $ 5,509 $ 3,521
Adjustments to reconcile net income
to net cash provided by operating activities
Equity in undistributed income of subsidiary (8,155) (6,168) (4,004)
Other, net 374 227 213
--------- -------- --------
Net cash flows from operating activities (271) (432) (270)
Cash flows from investing activities
Investment in subsidiary (2,000) (22,101) (7,500)
Purchases of securities, available for sale (11,496) (29,595) (1,235)
Maturity of securities, available for sale 9,885 23,150 4,115
Property and equipment acquired (20) -- --
--------- -------- --------
Net cash flows from investing activities (3,631) (28,546) (4,620)
Cash flows from financing activities
Proceeds from exercise of stock options 1,028 616 446
Issuance of common stock -- 34,040 --
Increase (decrease) in note payable -- (1,000) 1,000
--------- -------- --------
Net cash flows from financing activities 1,028 33,656 1,446
--------- -------- --------
Increase (decrease) in cash and cash equivalents (2,874) 4,678 (3,444)
Cash and cash equivalents at the beginning of year 5,390 712 4,156
--------- -------- --------
Cash and cash equivalents at end of year $ 2,516 $ 5,390 $ 712
========= ======== ========
42
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
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. 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. Identified intangible assets subject to amortization are $2,549,000.
Goodwill aggregates to $5,473,000.
The following table presents actual information for the Corporation for the year
ended December 31, 2005 and pro forma information for the Corporation including
the acquisition of Bank of Washtenaw for the years ended December 31, 2004 and
2003, as if the acquisition had occurred at the beginning of 2003.
Twelve Months Ended
(In thousands, except per share data) 12/31/05 12/31/04 12/31/03
--------- -------- --------
Interest income $ 43,855 $ 33,553 $ 27,884
Interest expense 16,403 10,691 10,255
--------- -------- --------
Net interest income 27,452 22,862 17,629
Provision for loan loss 1,081 1,419 1,912
--------- -------- --------
Net interest income after provision for loan losses 26,371 21,443 15,717
Non-interest income 722 1,575 3,230
Non-interest expense 15,716 13,741 13,248
--------- -------- --------
Income before income tax provision 11,377 9,277 5,699
Income tax provision 3,867 3,261 2,061
--------- -------- --------
Net income $ 7,510 $ 6,017 $ 3,638
========= ======== ========
Basic earnings per share $ 1.40 $ 1.39 $ 1.03
Diluted earnings per share $ 1.32 $ 1.27 $ 0.94
43
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2005, 2004 AND 2003
NOTE S - QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
Interest Net Interest Net Earnings per share
Income Income Income Basic Fully diluted
-------- ------------ ------ ------ -------------
2005
First quarter $ 9,892 $ 6,580 $1,765 $ 0.33 $ 0.31
Second quarter (1) 10,638 6,665 1,412 0.26 0.25
Third quarter 11,334 7,053 2,079 0.39 0.36
Fourth quarter 11,991 7,154 2,254 0.42 0.39
2004
First quarter $ 6,498 $ 4,484 $1,174 $ 0.33 $ 0.30
Second quarter 6,849 4,815 1,390 0.38 0.35
Third quarter (2) 7,426 5,003 1,402 0.29 0.27
Fourth quarter 9,017 6,079 1,543 0.29 0.27
(1) During the second quarter of 2005, the Corporation recognized an "Other
Than Temporary Loss" of $696,000. This write-down of securities, available
for sale resulted in a decrease of $459,000, which decreased basic
earnings per share and diluted earnings per share by $.09 and $.08,
respectively.
(2) Decline in income per share results from issuance of common stock during
the third quarter of 2004.
44
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 in 2004. The three
branches, previously operated by the Bank of Washtenaw were subsequently
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 48124
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, Suite 110 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, Suite 100 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 48124 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
45
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.
46
RESULTS OF OPERATIONS
2005 Compared to 2004. The Corporation reported net income of $7,510,000 in 2005
compared to $5,509,000 in 2004, an increase of $2,001,000 or 36%. The
Corporation's increase in net income was primarily due to an increase in net
interest income, partially offset by a decrease in other income and increases in
non-interest expense. The decrease in other income was primarily due to the
write-down and subsequent sale of a single security. The increase in
non-operating expense was primarily due to increases in salaries and employee
benefits and occupancy and equipment expense.
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.
NET INTEREST INCOME
2005 Compared to 2004. Net interest income for the period ended December 31,
2005 was $27,452,000 compared to $20,381,000 for the period ended December 31,
2004, an increase of $7,071,000 or 35%. 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 decreased to
3.63% in 2005 from 3.69% in 2004, a decrease of 6 basis points. The decrease in
the net interest rate spread was due to liability costs increasing faster than
asset yields. Additionally, the Bank has improved its asset mix by deploying a
larger proportionate share of its funds into loans. The increase in the cost of
deposits was primarily due to the repricing of the Bank's time deposits. The
Corporation's net interest margin increased to 4.14% in 2005 from 4.04% in 2004.
Average interest earning assets grew by $158.8 million between the periods while
interest bearing liabilities grew by $124.2 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 and the deployment of funds from the
sale of securities available for sale. During 2006, the Corporation is expecting
the net interest rate spread and net interest rate margin to decrease slightly
as a result of increasing deposit costs.
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.
47
Average Balances, Interest Rates and Yields. Net interest income is affected by
the difference ("interest rate spread") between rates of interest earned on
interest earning assets and rates of interest paid on interest bearing
liabilities and the relative amounts of interest bearing liabilities and
interest earning assets. When the total of interest earning assets approximates
or exceeds the total of interest bearing liabilities, any positive interest rate
spread will generate net interest income. Financial institutions have
traditionally used interest rate spreads as a measure of net interest income.
Another indication of an institution's net interest income is its "net yield on
interest earning assets" or "net interest margin," which is net interest income
divided by average interest earning assets.
The following table sets forth certain information relating to the Corporation's
consolidated average interest earning assets and interest bearing liabilities
and reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average daily balance of assets or liabilities, respectively, for
the periods presented. During the periods indicated, non-accruing loans, if any,
are included in the net loan category.
Year Ended December 31, 2005 Year Ended December 31, 2004
---------------------------- ----------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
- -------------- -------- -------- ------- --------- --------- -------
Assets
Interest bearing deposits with banks $ 3,675 $ 111 3.02% $ 9,305 $ 129 1.39%
Federal funds sold 7,783 242 3.11% 10,602 161 1.52%
Securities, available for sale 19,673 598 3.04% 23,122 460 1.99%
Loans 631,491 42,904 6.79% 460,840 29,040 6.30%
--------- -------- ---- --------- -------- ----
Sub-total earning assets 662,622 43,855 6.62% 503,869 29,790 5.91%
Other assets 30,220 19,715
--------- ---------
Total assets $ 692,842 $ 523,584
========= =========
Liabilities and stockholders' equity
Interest bearing deposits $ 506,228 $ 14,427 2.85% $ 393,004 $ 8,013 2.04%
Other borrowings 41,564 1,976 4.75% 30,634 1,396 4.56%
--------- -------- ---- --------- -------- ----
Sub-total interest bearing liabilities 547,792 16,403 2.99% 423,638 9,409 2.22%
-------- ---- -------- ----
Non-interest bearing deposits 63,164 45,456
Other liabilities 2,305 2,339
Stockholders' equity 79,581 52,151
--------- ---------
Total liabilities and stockholders' equity $ 692,842 $ 523,584
========= =========
Net interest income $ 27,452 $ 20,381
======== ========
Net interest rate spread 3.63% 3.69%
==== ====
Net interest margin on earning assets 4.14% 4.04%
==== ====
48
(continued)
Year Ended December 31, 2003
----------------------------
Average Average
(In thousands) Balance Interest Rate
- -------------- --------- -------- -------
Assets
Interest bearing deposits with banks $ 13,667 $ 153 1.12%
Federal funds sold 11,764 125 1.06%
Securities, available for sale 21,033 522 2.48%
Loans 329,720 22,764 6.90%
--------- -------- ----
Sub-total earning assets 376,184 23,564 6.26%
Other assets 20,988
---------
Total assets $ 397,172
=========
Liabilities and stockholders' equity
Interest bearing deposits $ 297,103 $ 7,212 2.43%
Other borrowings 30,697 1,419 4.62%
--------- -------- ----
Sub-total interest bearing liabilities 327,800 8,631 2.63%
-------- ----
Non-interest bearing deposits 35,311
Other liabilities 1,456
Stockholders' equity 32,605
---------
Total liabilities and stockholders' equity $ 397,172
=========
Net interest income $ 14,933
========
Net interest rate spread 3.63%
====
Net interest margin on earning assets 3.97%
====
49
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.
2005/2004 2004/2003
Change in Interest Due to: Change in Interest Due to:
-------------------------- --------------------------
Average Average Net Average Average Net
(In thousands) Balance Rate Change Balance Rate Change
--------- ------- --------- -------- --------- --------
Assets
Interest bearing deposits with banks $ (94) $ 76 $ (18) $ (60) $ 36 $ (24)
Federal funds sold (3) 84 81 (18) 54 36
Securities, available for sale 14 124 138 42 (104) (62)
Loans 12,728 1,136 13,864 8,263 (1,987) 6,276
-------- ------- -------- ------- ------- -------
Total earning assets $ 12,645 $ 1,420 $ 14,065 $ 8,227 $(2,001) $ 6,226
======== ======= ======== ======= ======= =======
Liabilities
Interest bearing deposits $ 4,820 $ 1,594 $ 6,414 $ 1,955 $(1,154) $ 801
Other borrowings 550 30 580 (3) (20) (23)
-------- ------- -------- ------- ------- -------
Total interest bearing liabilities $ 5,370 $ 1,624 $ 6,994 $ 1,952 $(1,174) $ 778
======== ======= ======== ======= ======= =======
Net interest income $ 7,071 $ 5,448
======== =======
Net interest rate spread (0.06%) 0.06%
======== =======
Net interest margin on earning assets 0.10% 0.07%
======== =======
PROVISION FOR LOAN LOSSES
2005 Compared to 2004. The provision for loan losses was $1,081,000 in 2005,
compared to $1,400,000 in 2004, a decrease of $319,000 or 23%. The decrease was
primarily due to slightly lower loan growth and slightly improved asset quality
during 2005. While net charge-offs increased to $157,000 in 2005 from $14,000 in
2004, non-performing loans declined from $3,099,000 at December 31, 2004 to
$1,173,000 at December 31, 2005. 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.
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.
50
NON-INTEREST INCOME
2005 Compared to 2004. Non-interest income was $722,000 in 2005, compared to
$1,332,000 in 2004, a decrease of $610,000 or 46%. The decrease was primarily
due to a write-down and subsequent loss on the sale of a single issue of FHLMC
preferred stock. A $696,000 write-down, and a $44,000 loss on the sale of the
FHLMC preferred stock were recognized during 2005. Non-interest income excluding
the write-down and subsequent sale of the FHLMC preferred stock was $1,462,000,
which would be an increase of $130,000 or 10% from 2004. Management expects that
non-interest income will continue to increase during 2006.
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.
NON-INTEREST EXPENSE
2005 Compared to 2004. Non-interest expense was $15,716,000 in 2005 compared to
$11,967,000 in 2004, an increase of $3,749,000 or 31%. The largest component of
the change in non-interest expense was salaries and employee benefits which
amounted to $9,366,000 in 2005. In 2004, salaries and employee benefits were
$7,722,000. The primary factors for the increase in salaries and employee
benefits expense was the first full year of operations of the three branch
offices that the Bank acquired as a result of the Bank of Washtenaw acquisition
in October of 2004. As of December 31, 2005, the number of full time equivalent
employees was 151 as compared to 139 as of December 31, 2004. Anticipated growth
during 2006 will require additional staff throughout most areas of the Bank.
The second largest component of the change in non-interest expense was
occupancy and equipment expense, which amounted to $2,528,000 in 2005. In 2004,
occupancy and equipment expense amounted to $1,582,000. Primary factors in the
increase were the first full year of operations at the Bank's Operations Center
and at the three branch offices that were acquired as a result of the Bank of
Washtenaw acquisition. Additionally, various technology investments were made
throughout the Bank.
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.
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.
51
INCOME TAX PROVISION
2005 Compared to 2004. The income tax expense was $3,867,000 in 2005 compared to
$2,837,000 in 2004, an increase of $1,030,000 or 36%. The increase was primarily
due to the increase in income before federal income tax as the effective tax
rate remained stable. Refer to Note I of the Notes to Consolidated Financial
Statements for additional information.
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.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2005 AND DECEMBER 31, 2004
Assets. Total assets at December 31, 2005 were $706,497,000 compared to
$652,662,000 at December 31, 2004, an increase of $53,835,000 or 8%. The
increase was primarily due to increases in loans.
Securities Available for Sale. Total securities available for sale, at December
31, 2005 were $17,153,000 compared to $21,075,000 at December 31, 2004, a
decrease of $3,922,000 or 19%. During 2005, the Corporation sold $4 million in
securities and $12 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 and a fair value of $17.2 million. The securities and their weighted
average yield at December 31, 2005 are as follows (in thousands):
December 31, 2005
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
US Treasury securities $ 16,665 $ -- ($68) $ 16,597
Mortgage backed securities 555 2 (1) 556
--------- ------ ---- ---------
Totals $ 17,220 $ 2 ($69) $ 17,153
========= ====== ==== =========
A maturity and repricing schedule of the securities portfolio at December 31,
2005 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 $ 12,623 3.37% $ 3,974 4.71% $ -- -- $ 16,597
Mortgage backed securities 7 4.90% -- -- 549 5.97% 556
--------- ---- -------- ---- ------ ---- ---------
Totals $ 12,630 $ 3,974 $ 549 $ 17,153
========= ======== ====== =========
The entire portfolio has a net unrealized loss of $67,000. 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.
52
The Bank recorded a loss on the sale of securities, available for sale on a
single security that totaled $740,000 during 2005. This security was 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 by 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
approached, the market value of this security had 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 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 coincided 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 expected the market value of this security to continue to improve
during 2005. When the value of this security did not increase as expected after
the interest rate reset during the second quarter of 2005, the Corporation
recognized an "Other Than Temporary Loss" of $696,000 on June 30, 2005. The
Corporation recorded an additional loss of $44,000 as a result of the sale of
the security on July 22, 2005
53
Loans. Total loans at December 31, 2005 were $657,037,000 compared to
$587,262,000 at December 31, 2004, an increase of $69,775,000 or 12%. The
components of the outstanding balances for the years ended December 31, are as
follows (in thousands):
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
Consumer loans $ 35,041 $ 42,149 $ 25,200 $ 22,170 $ 18,773
Commercial, financial, & other 130,750 129,103 68,922 46,187 28,920
Commercial real estate construction 107,292 72,286 50,087 30,083 10,463
Commercial real estate mortgages 336,657 296,634 208,305 139,243 90,200
Residential real estate mortgages 47,297 47,090 48,444 29,839 32,536
--------- --------- --------- --------- ---------
$ 657,037 $ 587,262 $ 400,958 $ 267,522 $ 180,892
========= ========= ========= ========= =========
During 2005, loans increased in most categories with stronger growth in
commercial real estate construction and commercial real estate mortgages. The
decline in consumer loans was primarily due to the increase in short term
interest rates. This category is comprised primarily of home equity lines of
credit. The increase during 2004 includes the acquisition of $67.1 million in
loans from the acquisition of the Bank of Washtenaw.
The Bank expects the percentage of total commercial loans and residential real
estate mortgages to increase as a percentage of the loan portfolio in 2006 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.
54
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, 2005 is listed below (in thousands):
Within Three to One to After
Three Twelve Five Five
Months Months Years Years Total
-------- -------- -------- -------- --------
Consumer loans $ 32,170 $ 593 $ 1,869 $ 338 $ 34,970
Commercial, financial & other 91,622 5,051 29,214 4,427 130,314
Commercial real estate construction 93,387 -- 11,127 2,778 107,292
Commercial real estate mortgages 62,985 19,239 241,583 12,745 336,552
Residential real estate mortgages 3,115 9,188 25,917 8,705 46,925
-------- -------- -------- -------- --------
$283,279 $ 34,071 $309,710 $ 28,993 656,053
======== ======== ======== ========
Non-accrual loans 984
--------
Total loans $657,037
========
Loans at fixed interest rates $ 5,661 $ 22,750 $282,861 $ 28,160 $339,432
Loans at variable interest rates 277,618 11,321 26,849 833 316,621
-------- -------- -------- -------- --------
$283,279 $ 34,071 $309,710 $ 28,993 656,053
======== ======== ======== ========
Non-accrual loans 984
--------
Total loans $657,037
========
Variable rate loans comprise 48% 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.
55
Allowance for Loan Losses. The allowance for loan losses at December 31, 2005
was $6,808,000 compared to $5,884,000 at December 31, 2004, an increase of
$924,000 or 16%. The increase was primarily to provide for the growth in the
loan portfolio during 2005. Transactions in the allowance for loan losses for
the years ended December 31, are as follows (in thousands):
2005 2004 2003 2002 2001
------- ------- ------- ------- ------
Balance, beginning of year $5,884 $4,314 $2,875 $1,922 $1,252
Allowance on loans acquired -- 184 -- -- --
Charge-offs:
Consumer loans 112 31 38 32 43
Commercial, financial & other 169 -- 141 141 251
Commercial real estate construction -- -- 50 -- --
Commercial real estate mortgages 86 -- 124 -- --
Residential real estate mortgages -- 100 -- -- --
Recoveries:
Consumer loans 37 12 13 9 32
Commercial, financial & other 131 44 30 65 12
Commercial real estate construction -- -- 50 -- --
Commercial real estate mortgages 10 61 -- -- --
Residential real estate mortgages 32 -- --
------ ------ ------ ------ ------
Net charge-offs 157 14 260 99 250
Additions charged to operations 1,081 1,400 1,699 1,052 920
------ ------ ------ ------ ------
Balance at end of year $6,808 $5,884 $4,314 $2,875 $1,922
====== ====== ====== ====== ======
Allowance to total loans 1.04% 1.00% 1.08% 1.07% 1.06%
Net Charge-offs to average loans 0.02% 0.00% 0.08% 0.04% 0.17%
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.
56
The allocation of the allowance for loan losses as of December 31, 2005 is as
follows (in thousands):
Total
-----
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Consumer loans $ 513 $ 551 $ 337 $ 282 $ 296
Commercial, financial, & other 2,024 1,653 972 660 578
Commercial real estate construction 1,272 976 639 312 6
Commercial real estate mortgages 2,689 2,302 1,899 1,344 828
Residential real estate mortgages 310 402 467 277 214
------ ------ ------ ------ ------
$6,808 $5,884 $4,314 $2,875 $1,922
====== ====== ====== ====== ======
Percent of allowance for loan losses in each category
to total allowance for loan losses
-----------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Consumer loans 7.54% 9.37% 7.81% 9.81% 15.40%
Commercial, financial, & other 29.74% 28.09% 22.53% 22.96% 30.07%
Commercial real estate construction 18.68% 16.59% 14.81% 10.85% 0.31%
Commercial real estate mortgages 39.49% 39.12% 44.02% 46.75% 43.08%
Residential real estate mortgages 4.55% 6.83% 10.83% 9.63% 11.13%
------ ------ ------ ------ ------
100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
Percent of loans in each category to total loans
------------------------------------------------
2005 2004 2003 2002 2001
------- ------- ------- ------- -------
Consumer loans 5.33% 7.17% 6.27% 8.29% 10.38%
Commercial, financial, & other 19.90% 21.97% 17.22% 17.26% 15.99%
Commercial real estate construction 16.33% 12.30% 12.55% 11.25% 5.78%
Commercial real estate mortgages 51.24% 50.54% 51.92% 52.05% 49.86%
Residential real estate mortgages 7.20% 8.02% 12.04% 11.15% 17.99%
------ ------ ------ ------ ------
100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
57
Bank Premises and Equipment. Bank premises and equipment at December 31, 2005
were $13,792,000 compared to $13,124,000 at December 31, 2004, an increase of
$668,000 or 5%. The increase was mainly due to upgrades in technology instituted
throughout the Bank and the purchase of land adjacent to the Dearborn Heights
office. The land was purchased during 2005 and developed into a parking lot in
order to provide convenient parking for the Bank's customers.
Real Estate Owned. Real estate owned at December 31, 2005 was $663,000, compared
to $138,000 at December 31, 2004, an increase of $525,000 or 380%. Real estate
owned at December 31, 2005 is comprised of three residential properties with an
appraised value of $782,000. The Bank expects to realize a gain as a result of
the sale of these properties during 2006.
Goodwill and other intangible assets. Goodwill and other intangible assets were
$7,764,000 at December 31, 2005, compared to $7,982,000 at December 31, 2004, a
decrease of $218,000 of 3%. The Bank has intangible assets for the estimated
value of core deposit accounts and borrower relationships 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 was valued at $929,000 and is being amortized over a
period of ten years. The borrower relationship intangible was valued to
$1,620,000 and is being amortized over a period of 17 years. At December 31,
2005, the core deposit intangible and borrower relationship intangible amounted
to $748,000 and $1,543,000, respectively.
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 $5.5 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. There was no impairment at December 31, 2005
Accrued Interest Receivable. Accrued interest receivable at December 31, 2005
was $2,586,000 compared to $1,889,000 at December 31, 2004, an increase of
$697,000 or 37%. The increase was primarily due to increase in the size and
yield of the loan portfolio.
Other Assets. Other assets at December 31, 2005 were $2,521,000 compared to
$3,093,000 at December 31, 2004, a decrease of $572,000 or 18%. The decrease was
largely due to a decrease in the Corporation's deferred tax asset.
58
Deposits. Total deposits at December 31, 2005 were $582,438,000 compared to
$540,880,000 at December 31, 2004, an increase of $41,558,000 or 8%. The
components of the outstanding balances and percentage increase in deposits from
2004 to 2005 are as follows (in thousands):
December 31, 2005 December 31, 2004 Percent
----------------- ----------------- -------
Balance Percent Balance Percent Increase/(Decrease)
------- ------- ------- ------- -------------------
Non-interest bearing:
Demand $ 59,652 10.24% $ 63,065 11.66% (5.41%)
-------- --------
Interest bearing:
Checking $ 13,413 2.30% $ 15,400 2.85% (12.90%)
Money market 26,514 4.55% 54,957 10.16% (51.76%)
Savings 69,503 11.93% 83,773 15.49% (17.03%)
Time, under $100,000 151,038 25.94% 124,448 23.01% 21.37%
Time, $100,000 and over 262,318 45.04% 199,237 36.84% 31.66%
-------- ------ -------- ------ ------
522,786 89.76% 477,815 88.34% 9.41%
-------- ------ -------- ------ ------
Total deposits $582,438 100.00% $540,880 100.00% 7.68%
======== ====== ======== ====== ======
The increase in deposits was primarily due to growth in time deposits. During
2005, the Bank completed an annual birthday celebration in March 2005, four time
deposit promotions and one promotion that introduced the Bank's High Performance
Savings product. Management developed these campaigns in order to increase
liquidity and diversify the Bank's deposit mix.
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 also began to utilize brokered
deposits as a source of funds. In order to coordinate and manage these efforts,
the Bank has also designated a public funds officer. Public funds at December
31, 2005 were $86.2 million compared to $92.9 million at December 31, 2004.
There were 28 and 35 entities with public funds on deposit at December 31, 2005
and December 31, 2004, respectively. The average term of time deposits invested
with the Bank by public units was 95 and 183 days at December 31, 2005 and 2004,
respectively. Brokered deposits were $45.1 million with an average rate of 3.79%
at December 31, 2005, compared to $19.2 million with an average rate of 2.85% at
December 31, 2004.
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 $ 87,502 $ 27,803 $115,305
Due in over three months through six months 45,996 20,733 66,729
Due in over six months through one year 65,824 61,768 127,592
Due in over one year through five years 62,996 40,734 103,730
-------- -------- --------
$262,318 $151,038 $413,356
======== ======== ========
59
The following is a summary of the distribution and weighted average interest
rate of deposits at December 31, 2005 (in thousands):
2005 2004
-------------------- -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- -------- -------- --------
Non-interest bearing:
Demand $ 59,652 -- $ 63,065 --
-------- --------
Interest bearing:
Checking $ 13,413 1.01% $ 15,400 1.44%
Money market 26,514 2.43% 54,957 1.94%
Savings 69,503 1.90% 83,773 1.00%
Time, under $100,000 151,038 3.70% 124,448 2.73%
Time, $100,000 and over 262,318 3.90% 199,237 2.64%
-------- --------
522,786 477,815
-------- --------
$582,438 $540,880
======== ========
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 and brokered deposits to a greater degree. Management believes that
the weighted average rate of deposits will continue to increase during 2006.
Federal Home Loan Bank Advances. Federal Home Loan Bank advances at December 31,
2005 amounted to $25,588,000 compared to $20,614,000 at December 31, 2004, an
increase of $4,974,000. This increase is primarily due to the Bank borrowing a
three year Federal Home Loan Bank advance in the amount of $5,000,000 with a
rate of 4.43% that matures in 2008.
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 $1,615,000 at December 31, 2005 compared
to $4,115,000 at December 31, 2004, a decrease of $2,500,000 or 61%. These
borrowings were comprised of several repurchase agreements that were acquired in
the 2004 acquisition of the Bank of Washtenaw. These repurchase agreements are
secured by securities held by the Bank.
Other Liabilities. Other liabilities were $960,000 at December 31, 2005 compared
to $1,342,000 at December 31, 2004, a decrease of $382,000 or 28%. The decrease
was primarily due to a decrease in accrued expenses.
Accrued Interest Payable. Accrued interest payable at December 31, 2005 was
$1,683,000 compared to $1,107,000 at December 31, 2004, an increase of $576,000
or 52%. The increase was due to the increase in deposits during 2005.
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, 2005 was $84,213,000 compared to
$74,604,000 as of December 31, 2004, an increase of $9,609,000 or 13%. Capital
increased during 2005 primarily due to net income during 2005.
At December 31, 2005 and 2004, 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 has no significant exposure to
changes in commodity prices. Any impact that change foreign exchange rates or
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, 2005 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 $ 2,268 $ -- $ -- $ -- $ 2,268
Interest bearing deposits with Banks 69 -- -- -- 69
Mortgage loans held for sale 1,041 -- -- -- 1,041
Securities available for sale 5,695 6,936 3,974 548 17,153
Federal Home Loan Bank stock 1,293 -- -- -- 1,293
Total loans, net of non-accrual 283,279 34,071 309,710 28,993 656,053
------- --------- ------- -------- --------
Total earning assets 293,645 41,007 313,684 29,541 677,877
Interest bearing liabilities
Total interest bearing deposits 224,735 194,321 103,730 -- 522,786
Federal Home Loan Bank advances -- 10,000 15,588 -- 25,588
Other Borrowings 1,615 -- -- -- 1,615
Trust preferred securities 10,000 -- -- -- 10,000
------- --------- ------- -------- --------
Total interest bearing liabilities 236,350 204,321 119,318 -- 559,989
------- --------- ------- -------- --------
Net asset (liability) funding gap 57,295 (163,314) 194,366 29,541 $117,888
------- --------- ------- -------- ========
Cumulative net asset (liability) funding gap $57,295 ($106,019) $88,347 $117,888
======= ========= ======= ========
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, 2005, 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 $1,224 13.14%
+ 200 Basis Points 882 9.47%
+ 100 Basis Points 423 4.54%
+ 100 Basis Points (448) (4.81%)
+ 200 Basis Points (1,022) (10.97%)
+ 300 Basis Points (1,988) (21.34%)
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, 2005 (in thousands):
Contractual Obligations
Payments Due By Period
-----------------------------------------------------------------------
Less Than 4-5 Over 5
1 Year 1-3 Years Years Years Total
--------- --------- ------- ------- --------
Securities sold under agreements to
repurchase $ 1,615 -- -- -- $ 1,615
Certificates of deposit 309,626 87,235 16,495 -- 413,356
Long-term borrowings 10,027 15,561 -- -- 25,588
Lease commitments 620 935 818 297 2,670
Subordinated debentures -- -- -- 10,000 10,000
-------- -------- ------- ------- --------
Totals $321,888 $103,731 $17,313 $10,297 $453,229
======== ======== ======= ======= ========
Unused Loan Commitments and Letters of Credit
Amount Of Commitment Expiration Per Period
-----------------------------------------------------------------------
Less Than 3-5 Over 5
1 Year 1-3 Years Years Years Total
--------- --------- ------- ------- --------
Unused loan commitments $121,707 $23,089 $4,228 $28,715 $177,739
Standby letters of credit 2,159 5,839 992 -- 8,990
-------- -------- ------- ------- --------
Totals $123,866 $28,928 $5,220 $28,715 $186,729
======== ======== ======= ======= ========
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 has utilized that review to develop and implement a
plan to utilize the Bank's technology systems more efficiently. During 2005, the
Bank completed its development of a website and began to offer Internet Banking.
64
DEARBORN BANCORP, INC.
DIRECTORS AND OFFICERS
DIRECTORS JEFFREY G. LONGSTRETH
Real Estate Broker
MARGARET I. CAMPBELL Century 21 - Curran & Christie
Retired, Manufacturing
MIICHAEL J. ROSS
JOHN E. DEMMER President and Chief Executive Officer
Chairman of the Board and Community Bank of Dearborn
Chief Executive Officer
Jack Demmer Ford, Inc.; DR. ROBERT C. SCHWYN
Jack Demmer Lincoln-Mercury, Inc. and Physician
Jack Demmer Leasing
RONNIE J. STORY
WILLIAM J. DEMMER President and Chief Executive Officer
President Story Development Corp. and Story
Jack Demmer Ford, Inc and Brothers Grading & Excavating
Jack Demmer Lincoln-Mercury, Inc.
OFFICERS
MICHAEL V. DORIAN, JR.
Vice President JOHN E. DEMMER
Mike Dorian Ford Chairman of the Board
DAVID HIMICK MICHAEL J. ROSS
Retired, Industrial Supply President and Chief Executive Officer
DONALD G. KARCHER JEFFREY L. KARAFA
Chairman of the Board Vice President, Treasurer and Secretary
Karcher Agency, Inc.
BRADLEY F. KELLER
President
Braden Associates, Inc. and
MultiGard Properties, Ltd.
65
COMMUNITY BANK OF DEARBORN
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS JEFFREY G. LONGSTRETH
Real Estate Broker
MARGARET I. CAMPBELL Century 21 - Curran & Christie
Retired, Manufacturing
MICHAEL J. ROSS
JOHN E. DEMMER President and Chief Executive Officer
Chairman of the Board 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 C.E.O.
Jack Demmer Ford, Inc. and Story Development Corp. and Story
Jack Demmer Lincoln Mercury Brothers Grading & Excavating
MICHAEL V. DORIAN, JR. EXECUTIVE OFFICERS
Vice President
Mike Dorian Ford MICHAEL J. ROSS
President
DAVID HIMICK Chief Executive Officer
Retired, Industrial Supply
JEFFREY L. KARAFA
DONALD G. KARCHER Senior Vice President
Chairman of the Board CFO & Secretary
Karcher Agency, Inc.
WARREN R. MUSSON
BRADLEY F. KELLER Senior Vice President
President Head of Lending
Braden Associates, Inc. and
MultiGard Properties, Ltd. STEPHEN C. TARCZY
Northeast Regional President
JEFFREY J. WOLBER
Senior Vice President
Branch Operations
66
COMMUNITY BANK OF DEARBORN
OFFICERS
TERRENCE R. O'NEIL DON A. PLAISTED MICHAEL A. VANOVER
First Vice President Vice President Assistant Vice President
Credit Administration Commercial Lending Regional Business Development
GARY W. AMES, JR. JAMES T. POWERS SUSAN M. VETTRAINO
Vice President Vice President Assistant Vice President
Controller Customer/Product Support Loss Prevention
KEVIN A. BANK H. KRISTENE RAUTIO PAMELA G. WILKS
Vice President Vice President Assistant Vice President
Senior Commercial Lender Business Development Customer/Product Support
MARK H. BOBINSKI DENNIS C. ROCHELEAU MARIAN ZELEJI
Vice President Vice President Assistant Vice President
Commercial Lending Cashier Mortgage Lending
DANIEL P. BROPHY GARY P. RUSCH STEPHENI C. AGUILA
Vice President Vice President Data Operations Officer
Senior Commercial Lender Commercial Lending
DEBBY M. ASTERIOU
KATHERINE T. BROWN WILLIAM M. SCHMIDT Treasury Officer
Vice President Vice President
Commercial Lending Senior Commercial Lender MARK D. BOWERS
Mortgage Loan Officer
DANIEL A. BZURA GREGORY M. SCHNEIDER
Vice President Vice President KAREN HENDERSHOT
Branch Administration Commercial Lending Branch Officer
RITA L. CAVATAIO STEVEN P. SLADE RICHARD T. JONES
Vice President Vice President Business Development Officer
Commercial Lending Consumer Lending/Collections
SANDRA L. LETHBRIDGE
GEORGE J. DEMOU PATRICIA M. CARMONA Branch Officer
Vice President Assistant Vice President
Senior Commercial Lender Accounting NADINE S. McMILLAN
Credit Administration Officer
ANTHONY W. DEVINE KAREN M. COVER
Vice President Assistant Vice President TIMOTHY D. SIERPIEN
Commercial Lending Regional Branch Administration Branch Officer
JIHAD A. HACHEM PATRICIA L. DANCIK CHARLES P. WASCZENSKI
Vice President Assistant Vice President Audit Officer
Senior Commercial Lender Regional Business Development
CAROLYN A. WILKINS
F. GLEN ISLAMI DAVID W. LESLIE Corporate Services Officer
Vice President Assistant Vice President
Compliance Commercial Lending
WYNN C. MILLER DENIS T. NISSLE
Vice President Assistant Vice President
Internal Audit Private Banking
REGAN J. MORIN MIHAI PARASCA
Vice President Assistant Vice President
Senior Commercial Lender Computer Systems & Network
MARK M. PACITTO ELIZABETH A. PIZZO
Vice President Assistant Vice President
Commercial Lending Human Resources
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.
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COMMUNITY BANK OF DEARBORN
LOCATIONS
Ann Arbor - Eisenhower and Washtenaw Regional Dearborn Heights
Lending Center 24935 West Warren Avenue
250 West Eisenhower Parkway, Suite 100 Dearborn Heights, MI 48127
Ann Arbor, MI 48103 Phone: (313)724-0100
Phone: (734)302-1481 Fax: (313)724-1010
Fax: (734)761-6332 Mark A. O'Keefe, Branch Manager
Michael A. Vanover, AVP & Regional Bus Devel.
Dearborn Administration and
Ann Arbor - Stadium Regional Lending Center
2180 West Stadium Boulevard 1360 Porter Street, Suite 200
Ann Arbor, MI 48103 Dearborn, MI 48124
Phone: (734)302-9165 Phone: (313)565-5700
Fax: (734)302-1485 Fax: (313)561-2291
Karen R. Hendershot, Branch Officer Warren R. Musson, Senior VP & Head of Lending
Auburn Hills and Oakland Regional Lending Center Plymouth Township
3201 University Drive, Suite 180 44623 Five Mile
Auburn Hills, MI 48326 Plymouth, MI 48170
Phone: (248)364-9700 Phone: (734)454-1000
Fax: (248)364-9701 Fax: (734)454-0123
Tim Sierpien, Branch Officer Mara Sears, Branch Manager
Canton Township Southgate
1325 N. Canton Center Road 12820 Fort Street
Canton, MI 48187 Southgate, MI 48195
Phone: (734)981-0022 Phone: (734)284-3300
Fax: (734)981-0033 Fax: (734)284-3311
Sandra L. Lethbridge, Branch Officer Kim Kelemen, Branch Manager
Clinton Township Saline
19100 Hall Road 450 East Michigan Avenue
Clinton Township, MI 48038 Saline, MI 48176
Phone: (586)416-4400 Phone: (734)429-3828
Fax: (586)416-6200 Fax: (734)429-9294
Karen M. Cover, AVP & Regional Branch Admin. Shelly L. Rankin, Branch Manager
Clinton Township Regional Lending Center Bank Operations Center
45000 River Ridge Drive, Suite 110 4000 Allen Road
Clinton Township, MI 48038 Allen Park, MI 48101
Phone: (586)416-0200 Phone: (313)381-3200
Fax: (586)416-0220 Fax: (313)381-6100
Stephen C. Tarczy, Northeast Regional President
Dearborn Office
22290 Michigan Avenue
Dearborn, MI 48124
Phone: (313)274-1000
Fax: (313)274-5050
Gary D. Zanley, Branch Manager
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 16, 2006, 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
------ ------ ------
2005
First quarter $30.90 $25.30 $26.50
Second quarter 28.48 25.31 25.90
Third quarter 26.64 25.18 25.70
Fourth quarter 26.23 23.15 24.75
2004
First quarter $24.65 $19.30 $22.00
Second quarter 30.75 21.78 29.00
Third quarter 29.47 25.25 26.10
Fourth quarter 30.03 26.00 29.16
All per share amounts presented have been adjusted to reflect the issuance of
stock dividends.
PRINCIPAL MARKET MAKERS
Citadel Derivatives Group, LLC Oppenheimer & Co, Inc.
131 South Dearborn Street, 32nd Floor 125 Broad Street
Chicago, IL 60603 New York, NY 10004
(312) 395-3121 (212) 668-8104
Citigroup Global Markets, Inc. Raymond James & Associates, Inc.
388 Greenwich St. 880 Carillon Parkway
New York, NY 10013 St. Petersburg, FL 33716
(212) 816-6000 (727) 567-1000
FIG Partners, LLC Susquehanna Capital Group
1545 Peachtree Street, Suite 650 401 City Line Avenue, Suite 220
Atlanta, GA 30309 Bala Cynwyd, PA 19004
(404) 601-7206 (610) 617-2600
Hill Thompson Magid, & Co. Tradition Asiel Securities, Inc.
15 Exchange Place, Suite 800 75 Park Place, 4th Floor
Jersey City, NJ 07302 New York, NY 10007
(201) 434-6900 (212) 791-4500
Howe Barnes Investments, Inc. UBS Capital Markets, L.P.
222 S. Riverside Plaza, 7th Floor 111 Pavonia Avenue
Chicago, Illinois 60606 Jersey City, NJ 07310
(312) 655-3000 (212) 804-3605
Knight Equity Markets, L.P. UBS Securities, LLC
545 Washington Boulevard 677 Washington Blvd.
Jersey City, NJ 07310 Stamford, CT 06901
(201) 557-6844 (203) 719-3000
71
[DEAR NASDAQ LISTED LOGO]
DEARBORN BANCORP, INC.
1360 Porter Street
Dearborn, Michigan 48124
Phone: (313) 565-5700
www.cbdear.com