Exhibit 13
[DEARBORN BANCORP INC. LOGO]
and its subsidiary
[COMMUNITY BANK LOGO]
2006
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..................................... 8
Report of Independent Registered Public Accounting Firm................ 9
Management's Report on Internal Control Over Financial Reporting....... 11
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................................... 47
Dearborn Bancorp, Inc. Directors and Officers.......................... 68
Community Bank of Dearborn Directors and Executive Officers............ 69
Community Bank of Dearborn Officers.................................... 70
Community Bank of Dearborn Subsidiaries................................ 71
Investor Information................................................... 73
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 Global 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, Clinton Township and
Auburn Hills. 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.
In 2006, the Corporation entered into a definitive agreement to acquire Fidelity
Financial Corporation of Michigan (Fidelity) for $70.5 Million. The acquisition
to be financed by the sale of the Corporation's common stock. On November 10,
2006, the Corporation completed the sale of 2,918,250 shares of common stock at
$20.00 per share. The shares were sold in a firm commitment underwritten
offering lead managed by Oppenheimer & Co., Inc. and co-managed by Howe Barnes
Hoefer & Arnett, Inc. The Corporation received net proceeds from the offering of
approximately $55.1 million. On January 4, 2007, the Corporation completed the
acquisition of Fidelity. For additional information regarding the acquisition of
Fidelity, refer to Note T.
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 MBT Title Services, 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, sells 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:
We are filled with what we consider justifiable pride as we report on
another solid performance by our Company during 2006. Once again, our net income
reached a new record high while our total assets were growing by more than 20%.
Moreover, we reached an agreement to make the largest acquisition in our history
and completed a highly successful stock offering to finance the transaction.
Because of all this, we closed the year just four days away from becoming a $1+
billion banking company. To put this accomplishment into perspective, recall
that Community Bank of Dearborn opened for business on February 28, 1994, with
one office, no deposits, no loans and just $7 million in total assets.
Net income for the past year was $7,819,000 or $1.17 per fully diluted
common share, 4.1 percent more than in 2005 when our earnings were $7,510,000 or
$1.20 per diluted share. During the year, total assets went up by 21.2 percent
to $855,931,000 while they had been $706,497,000 at the end of 2005. Total
deposits grew 8.7 percent, going to $633,216,000 from $582,438,000. Total loans
increased by 15.1 percent. They were $756,420,000 at year-end compared to
$657,037,000 at the beginning of the year.
Stockholders' equity was $144,985,000 at December 31 while it had been
$84,213,000 one year earlier. It should be noted, however, that we sold
approximately 2,900,000 additional shares of common stock at $20 per share in
the Fourth Quarter of the year, accounting for most of the increase.
Without a doubt, the single most important fact affecting our
profitability in 2006 was the "disappearing yield curve." This has been a
problem not just for us but for all banking companies, large and small, that
depend upon loans and investments for most of their income. Banks borrow from
their depositors at short-term rates and then lend and invest those funds at
intermediate and long-term rates. Beginning in 2005, the Federal Reserve began
raising short-term rates and banks had to increase the interest rates paid to
their depositors. Long-term rates, however, did not go up correspondingly,
largely because of excess liquidity in the international money markets. The
effect on our net interest margins has been very significant.
Our total interest income went up 22.9 percent in 2006, primarily
reflecting our growth. Total interest expense, however, went up 57.8 percent. As
a consequence, our net interest income only went up an anemic 2.0 percent. If we
had not experienced strong growth in the loan portfolio, it would have declined.
Some of our community bank peers around the country have attempted to
counteract this situation by making higher-yielding commercial real estate
loans, particularly for new construction. However, we have resisted the trend to
over-invest in these types of loans, which have been questioned by the various
banking regulators. Only 18.0 percent of our loans are construction loans. A
little more than 54 percent of our loans are commercial real estate loans but
most of them were made in connection with providing financing to our small and
mid-sized business customers. In many cases, we ask for a mortgage on a
customer's plant, store, or office building as additional collateral for the
loan.
4
The quality of our loan portfolio is best judged by activity in the
allowance for loan losses. In 2006, recoveries from loans previously charged off
exceeded charge offs by $24,000. Not every loan is always repaid in full as
agreed. Nevertheless, our record in this area suggests that most of our loans
are well secured and we can expect a significant recovery even if a borrower
does default. It should also be noted that at the end of 2006, we had only a
single house with an appraised value of $55,000 included in our other real
estate owned category and it was not considered material in the preparation of
our financial statements.
Still, we do not want to suggest that all of our customers are immune to
the economic distress that is widespread in southeastern Michigan. The troubles
of the "Big Three" auto manufacturers and their suppliers, large and small, have
been well documented in the national and local press. At year-end, we had $7.7
million in non-performing loans on our books. This was only nine-tenths of one
percent of total assets, a very manageable figure, even though it did represent
a significant increase during the past year.
We are often asked how we can expect to be successful in a market that has
been so depressed in recent years. The fact is that our largest corporations are
in serious trouble. Nevertheless, the Greater Detroit Metropolitan Area is still
the tenth largest market in the United States and, even in the midst of all its
problems, there are still substantial pockets of prosperity throughout the
region.
Our "secret of success" is to identify those pockets of prosperity and
then to seek deposits and loans there. Even with significant growth in the
recent past, we only hold about a one percent share of the total banking market
in southeastern Michigan. In short, when a banking organization is relatively
small and the overall market is huge, there are many opportunities for
profitable growth and compounding success even in a difficult economic
environment.
We believe that the success of our Fourth Quarter stock offering indicates
that we speak optimistically about our Company's prospects. This was a firm
commitment underwritten offering lead managed by Oppenheimer & Co. and
co-managed by Howe Barnes Hoefer & Arnett, Inc.. An initial offering of 2.7
million shares at $20 per share was oversubscribed by approximately 200,000
shares on the first day. Approximately one-third of these new shares were
purchased by individual investors. On the other hand, two-thirds of them were
purchased by institutional investors. These institutions use sophisticated
analysis to substantiate their purchase decisions. It is a vote of confidence
that all of us who are responsible for the performance of our Company
appreciate. We will certainly strive to meet the expectations of these new
stockholders as well as all of our existing ones.
5
We offered this new stock because, in September, we agreed to acquire
Fidelity Financial Corporation of Michigan for $70.5 million in cash. We used
the net proceeds from the offering of approximately $55.1 million along with
other resources to complete the acquisition on January 4, 2007.
Fidelity Financial is the holding company for Fidelity Bank. Founded in
1971, this Bank has its main office in Birmingham, Michigan, with single branch
offices in Bloomfield Township and Bingham Farms and four branch offices in
Southfield, all in Oakland County, Michigan. At December 31, 2006, Fidelity had
total assets of $220,400,000, total loans of $179,600,000 and total deposits of
$187,500,000. Thus, closing of the transaction gave our Company total assets of
well over $1 billion.
Oakland County has long been the most prosperous county in southeastern
Michigan. Along with Washtenaw County, it has experienced economic growth in
spite of the problems in other parts of the region. We expanded our operations
into Washtenaw County, site of the University of Michigan, in 2004 with the
acquisition of Bank of Washtenaw. That bank's three branches were consolidated
into Community Bank of Dearborn shortly after the transaction closed.
In the case of the seven Fidelity offices, we intend to continue operating
them under the Fidelity name for the time being although technically they will
become branches of Community Bank.
We are doing this because we are adopting the Fidelity name for our entire
organization effective April 30, 2007. We acquired the rights to this name along
with the rest of Fidelity Financial's assets. As we have grown and expanded our
geographic footprint, we have realized that in some cases the name, Community
Bank of Dearborn, has been an impediment to our marketing efforts.
There are too many potential customers who think of a "community bank" as
being too small to satisfy their financial services needs. In reality, our legal
lending limit is now over $20 million although we would never lend that much to
a single borrower without seeking participations from our correspondent banks.
Then, to further complicate matters, "of Dearborn" is construed by some as
suggesting a geographical limitation on our operations. If we were to change the
name of Community Bank of Dearborn to Fidelity Bank, we would be adopting a
respected name with no implications of small size or geographic limitations.
We have said on a number of occasions that the Board of Dearborn Bancorp
has no intention of declaring cash dividend at any time in the near future. We
still consider our Company to be in a "growth mode" and preservation of capital
is essential in such a situation. Nevertheless, our directors have continued
their policy of regularly declaring stock dividends in lieu of cash dividends so
that our stockholders receive tangible benefits from the progress we have been
making. Accordingly, five percent stock dividends were distributed in June and
December of 2006.
6
Now, as we begin a new year, we are concentrating on our marketing
activities while integrating Fidelity Bank's branches and operations into
Community Bank of Dearborn's. We anticipate meaningful economies of scale to
result from the consolidation of "backroom" functions and the seven Fidelity
offices in Oakland County will make us a definite factor in this vibrant part of
the metropolitan area. We believe that our proven approach to the business of
banking will allow us to attract sizeable volumes of new deposits and loans
through these locations.
The biggest problem we anticipate in 2007 is the flat yield curve, which
seems unlikely to change in the near term. We intend to continue dealing with
this situation by strictly controlling unnecessary overhead expenses and
redoubling our efforts to attract new and profitable business.
Overall, we are optimistic about our prospects during the coming months
and anticipate being in a position to provide you with another positive report
on the progress of our Company at this time next year.
Our directors and senior officers join us in inviting you to attend the
Annual Meeting on May 15, 2007. The meeting will be held at Park Place, 23400
Park Avenue, Dearborn, Michigan at 4:00 p.m. We look forward to meeting you,
providing you with a comprehensive report on our operations, answering your
questions and hearing your suggestions at that time.
Sincerely,
John E. Demmer Michael J. Ross
Chairman of the Board President and
Chief Executive Officer
7
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, 2006 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, 2006 and 2005,
and the Consolidated Statements of Income for the years ended December 31, 2006,
2005 and 2004 are included elsewhere in this Annual Report.
(In thousands, except share and per share data) 2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
OPERATIONS
Interest income $ 53,886 $ 43,855 $ 29,790 $ 23,564 $ 18,259
Interest expense 25,884 16,403 9,409 8,631 7,505
----------- ----------- ----------- ----------- -----------
Net interest income 28,002 27,452 20,381 14,933 10,754
Provision for loan losses 943 1,081 1,400 1,699 1,052
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan losses 27,059 26,371 18,981 13,234 9,702
Total non-interest income 925 505 1,065 1,917 1,250
Total non-interest expense 16,225 15,499 11,700 9,823 6,948
----------- ----------- ----------- ----------- -----------
Income before federal income tax expense 11,759 11,377 8,346 5,328 4,004
Income tax expense 3,940 3,867 2,837 1,807 1,357
----------- ----------- ----------- ----------- -----------
Net income $ 7,819 $ 7,510 $ 5,509 $ 3,521 $ 2,647
=========== =========== =========== =========== ===========
FINANCIAL CONDITION
Total assets $ 855,931 $ 706,497 $ 652,662 $ 446,075 $ 325,100
Mortgage loans held for sale 1,823 1,041 1,692 1,505 9,852
Securities, available for sale 5,878 17,153 21,075 16,948 22,216
Federal Home Loan Bank stock 1,288 1,293 1,122 1,073 1,033
Loans 756,420 657,037 587,562 400,958 267,522
Allowance for loan losses (7,775) (6,808) (5,884) (4,314) (2,875)
Other assets 98,297 36,781 26,226 8,757 7,902
Deposits 633,216 582,438 540,880 379,619 262,086
Federal Home Loan Bank advances 25,561 25,588 20,614 20,638 20,660
Subordinated debentures 10,000 10,000 10,000 10,000 10,000
Other borrowings 37,919 1,615 4,115 --- ---
Other liabilities 4,250 2,643 2,449 1,217 1,663
Stockholders' equity 144,985 84,213 74,604 34,601 30,691
PER SHARE INFORMATION (1)
Net income per common share - basic $ 1.23 $ 1.27 $ 1.16 $ 0.90 $ 0.69
Net income per common share - diluted $ 1.17 $ 1.20 $ 1.06 $ 0.83 $ 0.66
Book value per common share $ 16.15 $ 14.11 $ 12.80 $ 8.77 $ 7.95
Average shares outstanding - basic 6,372,471 5,899,281 4,767,907 3,908,219 3,841,761
Average shares outstanding - diluted 6,672,319 6,274,404 5,217,001 4,246,523 4,038,269
Shares outstanding at end of period 8,975,085 5,967,190 5,827,368 3,943,151 3,862,238
OTHER DATA
Return on average assets 1.02% 1.08% 1.05% 0.89% 0.93%
Return on average equity 8.20% 9.44% 10.56% 10.80% 9.08%
Net interest margin 3.80% 4.14% 4.04% 3.97% 3.94%
Net interest spread 3.06% 3.62% 3.69% 3.63% 3.37%
Allowance for possible credit losses to total loans 1.03% 1.04% 1.00% 1.08% 1.07%
Nonperforming assets to total assets 0.90% 0.26% 0.47% 0.42% 0.84%
Stockholders' equity to total assets 16.94% 11.92% 11.43% 7.76% 9.44%
Total interest expense to gross interest income 48.03% 37.40% 31.58% 36.63% 41.10%
Number of Offices 12 12 12 8 6
(1) All share and per share amounts have been adjusted to reflect the issuance
of stock dividends.
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, 2006 and 2005, 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, 2006. 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, 2006 and 2005, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2006, 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,
2006, 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 9, 2007 expressed an unqualified opinion
thereon.
Crowe Chizek and Company LLC
Grand Rapids, Michigan
March 9, 2007
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, 2006, 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 Corporation'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, 2006, 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, 2006, 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 9, 2007
expressed an unqualified opinion on those consolidated financial statements.
Crowe Chizek and Company LLC
Grand Rapids, Michigan
March 9, 2007
10
MANAGEMENT'S REPORT 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 Corporation's systems of internal control over financial
reporting presented in conformity with generally accepted accounting principles
as of December 31, 2006. 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, 2006, Dearborn Bancorp, Inc. maintained effective control over
financial reporting presented in conformity with generally accepted accounting
principles based on those criteria.
The Corporation's independent auditors have issued an audit report on our
assessment of the Corporation'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) 2006 2005
--------- ---------
ASSETS
Cash and cash equivalents
Cash and due from banks $ 5,824 $ 7,118
Federal funds sold 64,198 2,268
Interest bearing deposits with banks 8 69
--------- ---------
Total cash and cash equivalents 70,030 9,455
Mortgage loans held for sale 1,823 1,041
Securities, available for sale 5,878 17,153
Federal Home Loan Bank stock 1,288 1,293
Loans
Loans 756,420 657,037
Allowance for loan losses (7,775) (6,808)
--------- ---------
Net loans 748,645 650,229
Bank premises and equipment, net 14,293 13,792
Real estate owned 52 663
Goodwill 5,473 5,473
Other intangible assets 2,041 2,291
Accrued interest receivable 3,337 2,586
Other assets 3,071 2,521
--------- ---------
Total assets $ 855,931 $ 706,497
========= =========
LIABILITIES
Deposits
Non-interest bearing deposits $ 53,065 $ 59,652
Interest bearing deposits 580,151 522,786
--------- ---------
Total deposits 633,216 582,438
Other liabilities
Federal funds purchased 37,300 ---
Securities sold under agreements to repurchase 619 1,615
Federal Home Loan Bank advances 25,561 25,588
Other liabilities 516 960
Accrued interest payable 3,734 1,683
Subordinated debentures 10,000 10,000
--------- ---------
Total liabilities 710,946 622,284
STOCKHOLDERS' EQUITY
Common stock - no par value 10,000,000 shares
authorized, 8,975,085 and 5,967,190 shares
outstanding in 2006 and 2005, respectively 144,907 83,684
Retained earnings 84 573
Accumulated other comprehensive (loss) (6) (44)
--------- ---------
Total stockholders' equity 144,985 84,213
--------- ---------
Total liabilities and stockholders' equity $ 855,931 $ 706,497
========= =========
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) 2006 2005 2004
----------- ----------- -----------
Interest income
Interest on loans $ 52,321 $ 42,904 $ 29,040
Interest on securities, available for sale 834 598 460
Interest on deposits with banks 158 111 129
Interest on federal funds 573 242 161
----------- ----------- -----------
Total interest income 53,886 43,855 29,790
Interest expense
Interest on deposits 23,447 14,427 8,013
Interest on other liabilities 2,437 1,976 1,396
----------- ----------- -----------
Total interest expense 25,884 16,403 9,409
Net interest income 28,002 27,452 20,381
Provision for loan losses 943 1,081 1,400
----------- ----------- -----------
Net interest income after provision for loan losses 27,059 26,371 18,981
----------- ----------- -----------
Non-interest income
Service charges on deposit accounts 699 639 569
Fees for other services to customers 48 79 30
Gain on the sale of loans 145 361 407
Gain (loss) on the sale of securities 9 (44) ---
Loss on the write-down of securities --- (696) ---
Gain (loss) on the sale of real estate owned (103) 92 (28)
Other income 127 74 87
----------- ----------- -----------
Total non-interest income 925 505 1,065
Non-interest expenses
Salaries and employee benefits 10,288 9,402 7,722
Occupancy and equipment expense 2,420 2,528 1,582
Intangible expense 250 230 28
Advertising and marketing 385 384 336
Stationery and supplies 402 365 310
Professional services 768 893 436
Data processing 531 448 332
Other operating expenses 1,181 1,249 954
----------- ----------- -----------
Total non-interest expenses 16,225 15,499 11,700
----------- ----------- -----------
Income before federal income tax provision 11,759 11,377 8,346
Income tax provision 3,940 3,867 2,837
----------- ----------- -----------
Net income $ 7,819 $ 7,510 $ 5,509
=========== =========== ===========
Per share data:
Net income - basic $ 1.23 $ 1.27 $ 1.16
Net income - diluted $ 1.17 $ 1.20 $ 1.06
Weighted average number of shares outstanding - basic 6,372,471 5,899,281 4,767,907
Weighted average number of shares outstanding - diluted 6,672,319 6,274,404 5,217,001
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, 2006, 2005 and 2004
Accumulated
Other Total
Common Retained Comprehensive Stockholders'
(In thousands, except shares) Stock Earnings Income Equity
---------- ---------- ------------- -------------
Balance, January 1, 2004 $ 34,451 $ 128 $ 22 $ 34,601
Issuance of common stock 34,040 --- --- 34,040
Exercise of stock options 616 --- --- 616
Tax effect of issuance of stock options 518 --- 518
Stock dividend #1 2,504 (2,504) --- ---
Stock dividend #2 2,789 (2,789) --- ---
Net income --- 5,509 --- 5,509
Other comprehensive income
Net change in net unrealized loss on
securities available for
sale --- --- (1,030) (1,030)
Tax effects 350 350
------------- -------------
Other comprehensive loss --- --- (680) (680)
Total comprehensive income 4,829
---------- ---------- ------------- -------------
Balance, December 31, 2004 $ 74,918 $ 344 ($ 658) $ 74,604
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 $ 83,684 $ 573 ($ 44) $ 84,213
========== ========== ============= =============
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, 2006, 2005 and 2004
Accumulated
Other Total
Common Retained Comprehensive Stockholders'
Stock Earnings Income Equity
---------- ---------- ------------- -------------
Balance, January 1, 2006 $ 83,684 $ 573 ($ 44) $ 84,213
Issuance of common stock 55,131 --- --- 55,131
Purchase of common stock (2,824) --- --- (2,824)
Stock awards earned 151 --- --- 151
Stock options earned 67 --- --- 67
Exercise of stock options 292 --- --- 292
Tax effect of issuance of stock options 98 --- --- 98
Stock dividend #1 4,115 (4,115) --- ---
Stock dividend #2 4,193 (4,193) --- ---
Net income --- 7,819 --- 7,819
Other comprehensive income
Reclassification adjustment for gain
included in net income --- --- (9) (9)
Changes in net unrealized loss on
securities available for sale --- --- 68 68
------------- -------------
Net change in net unrealized loss
on securities available for sale --- --- 59 59
Tax effects (21) (21)
------------- -------------
Other comprehensive income --- --- 38 38
Total comprehensive income 7,857
---------- ---------- ------------- -------------
Balance, December 31, 2006 $ 144,907 $ 84 ($ 6) $ 144,985
========== ========== ============= =============
The accompanying notes are an integral part of these consolidated statements.
15
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Years Ended December 31,
---------------------------------
2006 2005 2004
--------- --------- ---------
Cash flows from operating activities
Interest and fees received $ 53,135 $ 42,710 $ 29,101
Interest paid (23,833) (15,827) (8,604)
Proceeds from sale of mortgages held for sale 22,339 37,556 42,320
Origination of mortgages held for sale (22,789) (36,446) (41,974)
Taxes paid (4,590) (3,400) (2,435)
Gain (loss) on sale of real estate owned (103) 92 (28)
Cash paid to suppliers and employees (14,146) (14,255) (11,476)
--------- --------- ---------
Net cash provided by operating activities 10,013 10,430 6,904
Cash flows from investing activities
Proceeds from the sale of securities available for sale 96,704 3,260 ---
Proceeds from calls, maturities and repayments
of securities available for sale 12,848 12,357 40,886
Purchases of securities available for sale (97,941) (11,496) (45,991)
(Purchase) sale of Federal Home Loan Bank stock 5 (171) (49)
Increase in loans, net of payments received (99,359) (69,632) (119,769)
Purchases of property and equipment (1,447) (1,648) (7,513)
Net cash paid in Bank of Washtenaw acquisition --- --- (5,010)
--------- --------- ---------
Net cash used in investing activities (89,190) (67,330) (137,446)
Cash flows from financing activities
Net increase (decrease) in non-interest bearing deposits (6,587) (3,413) (3,649)
Net increase in interest bearing deposits 57,365 44,971 98,637
Increase (decrease) in other borrowings (996) (2,500) 125
Net increase in federal funds payable 37,300 --- ---
Proceeds from Federal Home Loan Bank advances --- 5,000 ---
Repayments on Federal Home Loan Bank advances (27) (26) (24)
Issuance of common stock 55,131 --- 34,040
Purchase of common stock (2,824) --- ---
Exercise of stock options 292 1,028 616
Tax benefit of stock options exercised 98 426 518
--------- --------- ---------
Net cash provided by financing activities 139,752 45,486 130,263
Increase (decrease) in cash and cash equivalents 60,575 (11,414) (279)
Cash and cash equivalents at the beginning of the period 9,455 20,869 21,148
--------- --------- ---------
Cash and cash equivalents at the end of the period $ 70,030 $ 9,455 $ 20,869
========= ========= =========
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) 2006 2005 2004
-------- -------- --------
Reconciliation of net income to net cash provided by operating activities
Net income $ 7,819 $ 7,510 $ 5,509
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 943 1,081 1,400
Depreciation and amortization expense 946 980 556
Restricted stock award expense 151 21 ---
Stock option expense 67 10 ---
Accretion of discount on investment securities (277) (47) (71)
Amortization of premium on investment securities 8 38 19
Amortization of intangible assets 250 230 27
(Increase) decrease in mortgages held for sale (782) 651 (187)
Increase in interest receivable (751) (697) (182)
Increase in interest payable 2,051 576 209
(Gain) loss on sale or write-down of securities (9) 740 ---
(Increase) decrease in other assets 41 (281) (883)
Increase (decrease) in other liabilities (444) (382) 507
-------- -------- --------
Net cash provided by operating activities $ 10,013 $ 10,430 $ 6,904
======== ======== ========
Supplemental noncash disclosures:
Transfers from loans to real estate owned $ 91 $ 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, 2006, 2005 AND 2004
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.
Sale of Common Stock
The Corporation sold 2,918,250 shares of its common stock at $20.00 per
share on November 10, 2006. The net proceeds from the stock offering was
approximately $55,131,000. These proceeds were utilized to acquire
Fidelity Financial Corporation of Michigan ( Fidelity ) on January 4, 2007
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.
18
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 servicing 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, 2006, 2005 AND 2004
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.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or
loans otherwise classified as substandard or doubtful. The general
component covers non-classified loans and is based on historical or
industry loss experience adjusted for various factors.
A loan is impaired when full payment under the loan terms is not expected.
Loan relationships that are rated watch or worse with a balance above
$500,000 are individually evaluated for impairment. If a loan is impaired,
a portion of the allowance is allocated so that the loan is reported, net,
at the fair value of estimated future cash flows using the loan's existing
rate or at the fair value of the collateral if repayment is expected
solely from the collateral.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control
over the assets has been relinquished. Control over transferred assets is
deemed to be surrendered when the assets have been isolated from the
Corporation, the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange
the transferred assets, and the Corporation does not maintain effective
control over the transferred assets through an agreement to repurchase
them before their maturity.
Foreclosed Assets
Assets acquired through or instead of loan foreclosure are initially
recorded at 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
Federal Home Loan Bank (FHLB) Stock
The Bank is a member of the FHLB system. Members are required to own a
certain amount of stock based on the level of borrowings and other
factors, and may invest in additional amounts. FHLB stock is carried at
cost, classified as a restricted security, and periodically evaluated for
impairment based on ultimate recovery of par value. Both cash and stock
dividends are reported as income.
20
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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, which range from 10 to 17 years.
Stock Compensation
Effective January 1, 2006, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 123(R), Share-based Payment, using the
modified prospective transition method. Accordingly, the Company has
recorded stock-based employee compensation cost using the fair value
method starting in 2006. For 2006, adopting this standard resulted in a
reduction in net income of $67,000 and a decrease in basic and diluted
earnings per share of $.01.
The Corporation has two incentive stock plans. Employee compensation
expense under the 1994 Stock Option Plan was 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).
2004
-----------
Net Income
As reported $ 5,509
Less: stock-based compensation expense
determined under fair value based method (9)
-----------
Pro forma $ 5,500
Basic income per share
As reported $ 1.16
Pro forma $ 1.15
Diluted income per share
As reported $ 1.06
Pro forma $ 1.05
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 in 2005. Since stock-based
compensation cost is reflected in net income in 2005, there is no pro
forma effect.
21
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such
as commitments to make loans and commercial letters of credit, issued to
meet customer financing needs. The face amount for these items represents
the exposure to loss, before considering customer collateral or ability to
repay. Such financial instruments are recorded when they are funded.
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.
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.
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, 2006, 2005 AND 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Restrictions on Cash
The Corporation was required to have $25,000 and $3,980,000 of cash on
hand or on deposit with the Federal Reserve Bank to meet regulatory
reserve and clearing requirements at year end 2006 and 2005, respectively.
These balances do not earn interest. The decline in required reserves in
2006 resulted from revised designation of certain deposit accounts to
categories requiring lower reserves.
Dividend Restrictions
Banking regulations require maintaining certain capital levels and may
limit the dividends paid by the Bank to the Corporation or by the
Corporation to stockholders.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed in a separate
note. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments,
and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Adoption of New Accounting Standards:
In September 2006, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements (SAB 108), which is effective for fiscal years ending on or
after November 15, 2006. SAB 108 provides guidance on how the effects of
prior-year uncorrected financial statement misstatements should be
considered in quantifying a current year misstatement. SAB 108 requires
public companies to quantify misstatements using both an income statement
(rollover) and balance sheet (iron curtain) approach and evaluate whether
either approach results in a misstatement that, when all relevant
quantitative and qualitative factors have been considered, is material. If
prior year errors that have been previously considered immaterial now are
considered material based on either approach, no restatement is necessary
so long as properly applied its previous approach and all relevant facts
and circumstances were considered. Adjustments considered immaterial in
prior years under the method previously used, but now considered material
under the dual approach required by SAB 108, are to be recorded upon
initial adoption of SAB 108. The amount so recorded is shown as a
cumulative effect adjustment is recorded in opening retained earnings as
of January 1, 2006. The adoption of SAB 108 had no effect on the
Corporation's financial statements for the year ended December 31, 2006.
Effect of Newly Issued But Not Yet Effective Accounting Standards:
FIN 48, which prescribes a recognition threshold and measurement attribute
for a tax position taken or expected to be taken in a tax return. FIN 48
also provides guidance on derecognition, classification, interest and
penalties, accounting for interim periods, disclosure and transition. FIN
48 is effective for fiscal years beginning after December 15, 2006. The
Corporation has determined that the adoption of FIN 48 will not have a
material effect on the financial statements.
23
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
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, 2006
----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- --------------- ---------------- -----------
US Treasury securities $ 4,982 $ --- ($ 14) $ 4,968
Municipal bonds 497 4 --- 501
Mortgage backed securities 407 2 --- 409
---------------- --------------- ---------------- -----------
Totals $ 5,886 $ 6 ($ 14) $ 5,878
================ =============== ================ ===========
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
================ =============== ================ ===========
The amortized cost and fair value of securities available for sale at
December 31, 2006 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 through one year $ 5,062 $ 5,048
Due in one year through five years 417 421
Mortgage backed securities 407 409
---------------- -------------
Totals $ 5,886 $ 5,878
================ =============
24
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE B - SECURITIES AVAILABLE FOR SALE (Continued)
Sales of securities, available for sale during 2006 resulted primarily
from the liquidation of securities that were purchased during the fourth
quarter of 2006. These securities were purchased with funds received from
the sale of common stock on November 10, 2006. The funds received from the
sale of these securities were utilized for the acquisition of Fidelity on
January 4, 2007.
Sales of available for sale securities for the years ended December 31,
are as follows (in thousands):
2006 2005 2004
---------- --------- ---------
Proceeds $ 97,941 $ 3,260 $ ---
Gross gains 9 --- ---
Gross losses --- 740 ---
Securities having a carrying value of $1,392,000 and $4,524,000 at
December 31, 2006 and 2005, 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 2006 and 2005, aggregated by
investment category and length of time that individual securities have
been in a continuous unrealized loss position, are as follows:
December 31, 2006
--------------------------------------------------------------------------------
Less than one year One year or more Total
------------------------ ----------------------- -------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
--------- ------------ -------- ----------- ---------- ------------
US Treasury securities $ 983 ($ 1) $ 3,985 ($ 13) $ 4,968 ($ 14)
--------- ------------ -------- ----------- ---------- ------------
Totals $ 983 ($ 1) $ 3,985 ($ 13) $ 4,968 ($ 14)
========= ============ ======== =========== ========== ============
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)
--------- ------------ -------- ----------- ---------- ------------
Totals $ 10,142 ($ 22) $ 6,652 ($ 47) $ 16,794 ($ 69)
========= ============ ======== =========== ========== ============
25
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE B - SECURITIES AVAILABLE FOR SALE (Continued)
Unrealized losses on securities available for sale at December 31, 2006
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.
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
2006 2005 Incr(decr)
--------------- --------------- ----------
Consumer loans $ 32,282 $ 35,041 (7.87%)
Commercial, financial, & other 130,056 110,805 17.37%
Commercial real estate construction 135,306 118,358 14.32%
Commercial real estate mortgages 410,829 345,536 18.90%
Residential real estate mortgages 47,947 47,297 1.37%
--------------- --------------- ----------
756,420 657,037 15.13%
Allowance for loan losses (7,775) (6,808)
--------------- ---------------
$ 748,645 $ 650,229
=============== ===============
Certain directors and executive officers of the Corporation, including
their related interests, were loan customers of the Bank during 2006 and
2005. These loan transactions for the years ended December 31, are as
follows (in thousands):
2006 2005
--------------- ---------------
Balance, beginning of year $ 2,757 $ 4,150
New loans during period 337 970
Repayments made during period (597) (2,363)
--------------- ---------------
Balance, end of period $ 2,497 $ 2,757
=============== ===============
26
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE C - LOANS, NET (Continued)
Activity in the allowance for loan losses for the years ended December 31
are as follows (in thousands):
2006 2005 2004
------------- ----------- -------------
Balance, beginning of year $ 6,808 $ 5,884 $ 4,314
Allowance on loans acquired --- --- 184
Charge-offs:
Consumer loans 24 112 31
Commercial, financial & other 139 169 ---
Commercial real estate construction --- --- ---
Commercial real estate mortgages 36 86 ---
Residential loans 38 --- 100
Recoveries:
Consumer loans 17 37 12
Commercial, financial & other 218 131 44
Commercial real estate construction --- --- ---
Commercial real estate mortgages 26 10 61
Residential loans --- 32 ---
------------- ----------- -------------
Net charge-offs (recoveries) (24) 157 14
Provision for loan losses 943 1,081 1,400
------------- ----------- -------------
Balance at end of period $ 7,775 $ 6,808 $ 5,884
============= =========== =============
27
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE C - LOANS, NET (Continued)
The aggregate balances in impaired loans at December 31, are as follows
(in thousands):
2006 2005
------ ----
Impaired loans with no allocated allowance
for loan losses $1,306 $341
Impaired loans with allocated allowance
for loan losses 4,254 200
------ ----
Total $5,560 $541
====== ====
Amount of the allowance for loan loss allocated $ 911 $ 69
Average of impaired loans during the year $3,788 $940
Interest income recognized during impairment $ --- $---
Cash-basis interest income recognized $ --- $---
Non-performing assets were as follows (in thousands):
2006 2005 2004
------ ------ ------
Troubled debt restructuring $ --- $ --- $ ---
Over 90 days past due 2,101 189 143
Non-accrual loans 5,560 984 2,956
------ ------ ------
Total non performing loans 7,661 1,173 3,099
Real estate owned 52 661 136
Other repossessed assets 2 2 2
------ ------ ------
Other non performing assets 54 663 138
------ ------ ------
Total nonperforming assets $7,715 $1,836 $3,237
====== ====== ======
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, 2006, 2005 AND 2004
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment are comprised of the following at December 31 (in
thousands):
2006 2005
------- -------
Land and improvements $ 3,235 $ 3,232
Building and improvements 10,226 10,214
Furniture and equipment 5,859 5,366
------- -------
19,320 18,812
Less accumulated depreciation 5,027 5,020
------- -------
Totals $14,293 $13,792
======= =======
Depreciation expense for 2006, 2005 and 2004 amounted to $946,000,
$980,000, and $556,000, respectively. During 2006, the Corporation made
capital expenditures of $1,447,000. The expenditures were primarily due to
expansion and renovation of two branch offices, a new phone system and
other improvements in technology. The Corporation retired fully
depreciated assets of $939,000.
Rent expense for facilities of $622,000, $617,000 and $678,000 was
incurred during 2006, 2005 and 2004, respectively. Rental commitments
under noncancellable operating leases are as follows, before considering
renewal options that generally are present (in thousands):
2007 $ 582
2008 542
2009 542
2010 476
2011 401
Thereafter ---
--------
$ 2,543
========
29
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
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. The
Corporation identified a core deposit intangible of $929,000 and a
borrower relationship intangible of $1,620,000. These intangible assets
were separated from goodwill. The Corporation recorded amortization
expense of $250,000, $230,000 and $28,000 during 2006, 2005 and 2004,
respectively. Goodwill amounted to $5,473,000 and there was no impairment
of that goodwill during 2006.
Information concerning other intangible assets at December 31, 2006 and
2005 were as follows (in thousands):
2006
----------------------------
Gross
Carrying Accumulated
Amount Amortization
------------- -------------
Amortized intangible assets
Core deposit intangible $ 929 $ 302
Borrower relationship intangible 1,620 206
-------------- -------------
Total $ 2,549 $ 508
============= =============
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
-------------
2007 $ 257
2008 249
2009 249
2010 216
2011 194
30
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE F - DEPOSITS
Time deposits of $100,000 or more were $330,025,000 and $262,318,000 at
December 31, 2006 and 2005, respectively. Time deposits of $100,000 or
more from governmental units, which are included in total time deposits of
$100,000 or more were $115,363,000 and $85,237,000 at December 31, 2006
and 2005, respectively.
Scheduled maturities of time deposits at December 31, 2006 are listed in
the following table (in thousands):
$100,000 and over Less than $100,000 Total
----------------- ------------------ --------
2007 $ 289,688 $ 110,215 $399,903
2008 16,031 8,166 24,197
2009 7,835 2,804 10,639
2010 6,580 2,493 9,073
2011 9,891 7,220 17,111
----------------- ------------------ --------
Totals $ 330,025 $ 130,898 $460,923
================= ================== ========
Related party deposits from directors and executive officers of the
Corporation were approximately $8,481,000 and $8,768,000 at December 31,
2006 and 2005, 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 $1.0 million and
$4.0 million at December 31, 2006 and 2005, 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):
2006 2005
------ ------
Balance at year-end $ 619 $1,615
Average daily balance during the year $ 628 $2,995
Average interest rate during the year 1.25% 1.25%
Maximum month-end balance during year $1,442 $3,612
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, 2006, 2005 AND 2004
NOTE H - FEDERAL FUNDS PURCHASED
The Bank maintains several borrowing lines of credit with several
correspondent banks. These borrowing lines of credit are a short-term
source of funds that charge a floating interest rate. Information
concerning federal funds purchased is summarized as follows (in
thousands):
2006
--------
Balance at year-end $ 37,300
Average daily balance during the year $ 7,512
Average interest rate during the year 5.29%
Maximum month-end balance during year $ 37,300
Weighted average interest rate at year-end 5.58%
NOTE I - 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 $25,561,000 and
$25,588,000 at December 31, 2006 and 2005, 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 $41,558,000, commercial real
estate loans in the amount of $82,187,000 and securities available for
sale in the amount of $387,000. Federal Home Loan Bank advances are
comprised of the following at December 31, 2006 (in thousands):
Date Amount Rate Maturity Date
- --------------------- ---------------- ---------------- -------------------
2001 $ 5,000 4.54% 2007
2001 5,000 4.68% 2008
2002 561 4.01% 2007
2005 5,000 4.43% 2008
2006 10,000 4.96% 2008
---------------- ----------------
Total $ 25,561 4.70%
================ ================
The Bank makes monthly interest payments with principal generally due at
maturity. Required principal payments at year-end 2006 are $5.6 million in
2007, $20.0 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 $40.8
million based on collateral pledged by the Bank at December 31, 2006.
NOTE J - SUBORDINATED DEBENTURES
In 2002, Dearborn Bancorp Trust I, a special purpose entity formed by the
Corporation issued $10,000,000 of floating rate obligated mandatory
redeemable securities as part of a pooled offering. The Corporation issued
$10,000,000 of subordinated debentures to the trust in exchange for the
proceeds of the offering. The interest rate on the debentures is the three
month LIBOR plus 3.35% and was 8.72% at December 31, 2006. The securities
have a term of thirty years with interest payments due on a quarterly
basis. The Corporation may redeem the debentures after December 19, 2007,
with regulatory approval, at face value.
32
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE K - INCOME TAXES
The federal tax provision consists of the following (in thousands):
2006 2005 2004
---------- ------------ ----------
Current $ 4,260 $ 4,330 $ 3,301
Deferred (320) (463) (464)
---------- ------------ ----------
$ 3,940 $ 3,867 $ 2,837
========== ============ ==========
The details of the net deferred tax asset are as follows at December 31,
(in thousands):
2006 2005
------- -------
Deferred tax assets
Provision for possible credit losses $ 2,595 $ 2,226
Deferred loan fees and costs 182 246
Unrealized losses on securities, available for sale 3 23
Capital loss 252 252
Other 92 28
------- -------
Total deferred tax assets 3,124 2,775
Deferred tax liabilities
Premises and equipment (234) (271)
Goodwill and other intangibles (233) (138)
Other (116) (125)
------- -------
Total deferred tax liabilities (583) (534)
------- -------
Net deferred tax asset (liability) $ 2,541 $ 2,241
======= =======
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, 2006.
33
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE L - 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):
2006 2005
------------------- -------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
Assets:
Cash and cash equivalents $ 70,030 $ 70,030 $ 9,455 $ 9,455
Mortgage loans held for sale 1,823 1,837 1,041 1,055
Securities, available for sale 5,878 5,878 17,153 17,153
Federal Home Loan Bank Stock 1,288 1,288 1,293 1,293
Loans, net 748,645 752,082 650,229 647,621
Accrued interest receivable 3,337 3,337 2,586 2,586
Liabilities:
Deposits 633,216 634,084 582,438 582,629
Federal funds purchased 37,300 37,300 --- ---
Securities sold under agreements to repurchase 619 619 1,615 1,615
Federal Home Loan Bank advances 25,561 25,367 25,588 26,002
Subordinated debentures 10,000 10,000 10,000 10,000
Accrued interest payable 3,734 3,734 1,683 1,683
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, 2006, 2005 AND 2004
NOTE L - 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 $171,095,000
and $186,729,000 at December 31, 2006 and 2005, respectively. Loan
commitments for variable rate loans were $125,128,000 and $167,474,000 at
December 31, 2006 and 2005, respectively. Loan commitments for fixed rate
loans were $52,168,000 and $19,255,000 at December 31, 2006 and 2005,
respectively. The fixed rate loan commitments at December 31, 2006 have
interest rates ranging from 5.35% to 9.25% and maturities ranging from one
year to eight years. A distribution of outstanding loan commitments by
contractual maturity is shown below (in thousands):
At December 31, 2006
Commitment Period
----------------------------------------------------------
Less than 1 - 3 4 - 5 Over
1 year years years 5 years Totals
---------- ---------- ---------- ---------- ----------
Home equity lines of credit $ 102 $ 608 $ 3,463 $ 12,205 $ 16,378
Residential loan commitments 2,034 --- --- --- 2,034
Standby letters of credit 5,195 3,017 --- --- 8,212
Commercial lines of credit 55,240 1,378 1,413 237 58,268
Other commercial commitments 58,951 23,037 4,190 25 86,203
---------- ---------- ---------- ---------- ----------
Totals $ 121,522 $ 28,040 $ 9,066 $ 12,467 $ 171,095
========== ========== ========== ========== ==========
At December 31, 2005
Commitment Period
----------------------------------------------------------
Less than 1 - 3 4 - 5 Over
1 year years years 5 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 3411 $ 8,613 91,583
---------- ---------- ---------- ---------- ----------
Totals $ 123,866 $ 28,928 $ 5,220 $ 28,715 $ 186,729
========== ========== ========== ========== ==========
35
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE L - 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 M - 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
2006, 2005 and 2004, employer contributions were $171,000, $148,000 and
$121,000, respectively.
NOTE N - 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, 2006 and 2005, 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, 2006, 2005 AND 2004
NOTE N - 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, 2006
Total capital
(to risk weighted assets)
Consolidated 155,252 19.69% 63,066 8.00% N/A N/A
Bank 85,451 11.06% 61,826 8.00% 77,283 10.00%
Tier 1 capital
(to risk weighted assets)
Consolidated 147,477 18.71% 31,533 4.00% N/A N/A
Bank 77,676 10.05% 30,913 4.00% 46,370 6.00%
Tier 1 capital
(to average assets)
Consolidated 147,477 18.12% 32,555 4.00% N/A N/A
Bank 77,676 10.11% 30,739 4.00% 38,424 5.00%
As of December 31, 2005
Total capital
(to risk weighted assets)
Consolidated 93,281 13.29% 56,147 8.00% N/A N/A
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% N/A N/A
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% N/A N/A
Bank 69,109 10.09% 27,400 4.00% 34,250 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 at December 31, 2006, the
Bank could pay approximately $20,800,000 in dividends to the parent
company without prior regulatory approval. No cash dividends have ever
been paid by the Corporation.
37
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE O - 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
814,449 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. No options are available for grant under this
plan.
A summary of the option activity in the 1994 Plan follows:
Weighted
Available Average
for Options Exercise
Grant Outstanding Price
----------- ----------- -----------
Outstanding at January 1, 2004 --- 754,227 7.82
Exercised --- (97,277) 7.10
----------- ----------- -----------
Outstanding at December 31, 2004 --- 656,950 7.93
Exercised --- (139,810) 7.66
----------- ----------- -----------
Outstanding at December 31, 2005 --- 517,140 8.00
Exercised --- (48,717) 6.40
----------- ----------- -----------
Outstanding at December 31, 2006 --- 468,423 $ 8.16
=========== =========== ===========
Options outstanding under the 1994 Plan at December 31, 2006 were as
follows:
Outstanding Exerciseable
------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Number Life Price Number Price
- ------------------------ ----------- ----------- ----------- ----------- -----------
$4.96 - $9.36 349,840 3.9 years $ 6.48 349,840 $ 6.48
$10.97 - $14.65 118,583 6.1 years $ 13.15 118,583 $ 13.15
----------- -----------
Totals 468,423 5.3 years $ 8.16 468,423 $ 8.16
=========== ===========
38
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE O - INCENTIVE STOCK PLANS (Continued)
At December 31, 2006, 2005 and 2004, 468,423, 517,140 and 656,950 options were
exercisable at weighted average exercise prices of $8.16, $8.00 and $7.93 per
share, respectively. On December 31, 2006, there were no shares available for
grant under the 1994 Plan.
There were no antidilutive options outstanding for the years ended December 31,
2006 and 2005. The intrinsic value of options exercised during the years ended
December 31, 2006, 2005 and 2004 were approximately $707,000, $1,592,000 and
$1,280,000, respectively. The intrinsic value of options outstanding at December
31, 2006 was approximately $5,077,000.
During 2005, the Corporation initiated the 2005 Long-Term Incentive Plan. Under
this plan, up to 347,248 shares may be granted to officers and employees of the
Bank. This plan provides that stock awards may take the form of any combination
of options, shares, 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
August of 2006, the Corporation's Compensation Committee authorized and 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 $7.83 and $8.36 for options
granted during 2006 and 2005, respectively. The following assumptions were used
to determine weighted average fair value of the options granted at grant date:
2006 2005
----------- -----------
Risk-free interest rate 4.77% 4.39%
Expected option life 6.5 years 6.5 years
Dividend yield 0.00% 0.00%
Expected volatility of stock price 18.37% 25.09%
39
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE O - INCENTIVE STOCK PLANS (Continued)
A summary of the plan's option activity during 2005 and 2006 is as follows:
Weighted
Average
Number Exercise
of Shares Price
---------- ----------
Outstanding at January 1, 2005 ---
Shares Granted - Stock Options 17,467 $ 20.83
---------- ----------
Outstanding at December 31, 2005 17,467 ---
Shares Granted - Stock Options 17,784 22.81
---------- ----------
Outstanding at December 31, 2006 35,251 $ 21.83
========== ==========
Options exercisable ---
==========
During the twelve months ended December 31, 2006, the Corporation recognized
stock option compensation expense of $67,000. The stock options vest on June 30,
2008 and June 30, 2009. Compensation cost of $87,000, $44,000 and $22,000 is
expected to be recognized during 2007, 2008 and 2009, respectively.
Stock Grants - Stock awards are granted to officers. A summary of the plan's
stock award activity is as follows:
Number Grant Date
of Shares Value per Share
---------- ---------------
Outstanding at January 1, 2005 ---
Shares Awarded 12,843 $ 20.83
----------
Outstanding at December 31, 2005 12,843
Shares Awarded 12,239 $ 22.81
Shares Forfeited (513)
----------
Outstanding at December 31, 2006 24,569
==========
Shares vested ---
==========
The stock grants vest on June 30, 2008 and June 30, 2009. Compensation cost of
$151,000 was recognized during the twelve months ended December 31, 2006.
Compensation cost of $197,000, $93,000 and $47,000 is expected to be recognized
during 2007, 2008 and 2009, respectively.
40
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE P - 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, 2006, 2005 and 2004 (in thousands, except share and per share
data):
2006 2005 2004
---------- ---------- ----------
Basic
Net income $ 7,819 $ 7,510 $ 5,509
Weighted average common shares 6,372,471 5,899,281 4,767,907
Basic earnings per common share $ 1.23 $ 1.27 $ 1.16
Diluted
Net income $ 7,819 $ 7,510 $ 5,509
Weighted average common shares
outstanding for basic earnings per
common share 6,372,471 5,899,281 4,767,907
Add: Dilutive effects of assumed 299,848 375,123 449,094
exercise of stock options
Average shares and dilutive potential
common shares 6,672,319 6,274,404 5,217,001
Dilutive earnings per common share $ 1.17 $ 1.20 $ 1.06
Stock options for 35,251 shares of common stock were not considered in
computing diluted earnings per common share for 2006 because they were
antidilutive. There were no antidilutive options in 2005 or 2004. All
share and per share amounts have been adjusted for stock dividends.
41
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE Q - 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) 2006 2005
---------- ----------
ASSETS
Cash and cash equivalents $ 63,416 $ 2,516
Securities available for sale 4,065 12,629
Investment in subsidiary 85,192 76,850
Other assets 2,568 2,074
---------- ----------
Total assets $ 155,241 $ 94,069
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Other liabilities $ 256 ($ 144)
Subordinated debentures 10,000 10,000
---------- ----------
Total liabilities 10,256 9,856
---------- ----------
Stockholders' equity 144,985 84,213
---------- ----------
Total liabilities and stockholders' equity $ 155,241 $ 94,069
========== ==========
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
------------------------------------
(In thousands) 2006 2005 2004
---------- ---------- ----------
Interest income $ 948 $ 447 $ 260
Operating expenses 1,446 1,092 919
---------- ---------- ----------
Net loss before equity in undistributed
income of subsidiary (498) (645) (659)
Equity in undistributed income
of subsidiary 8,317 8,155 6,168
---------- ---------- ----------
Net income $ 7,819 $ 7,510 $ 5,509
========== ========== ==========
42
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE Q - PARENT ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------
(In thousands) 2006 2005 2004
---------- ---------- ----------
Cash flows from operating activities
Net income $ 7,819 $ 7,510 $ 5,509
Adjustments to reconcile net income
to net cash provided by operating activities
Equity in undistributed income of subsidiary (8,317) (8,155) (6,168)
Other, net 81 (52) (291)
---------- ---------- ----------
Net cash flows provided by operating activities (417) (697) (950)
Cash flows from investing activities
Investment in subsidiary --- (2,000) (22,101)
Purchases of securities, available for sale (77,920) (11,496) (29,595)
Proceeds from the sale of securities available for sale 77,840
Proceeds from calls, maturities and repayments
of securities available for sale 8,700 9,885 23,150
Property and equipment acquired --- (20) ---
---------- ---------- ----------
Net cash flows used in investing activities 8,620 (3,631) (28,546)
Cash flows from financing activities
Proceeds from exercise of stock options 292 1,028 616
Repurchase of common stock (2,824) --- ---
Issuance of common stock 55,131 --- 34,040
Tax benefit of stock options exercised 98 426 518
Decrease in note payable --- --- (1,000)
---------- ---------- ----------
Net cash flows used in financing activities 52,697 1,454 34,174
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 60,900 (2,874) 4,678
Cash and cash equivalents at the beginning of year 2,516 5,390 712
---------- ---------- ----------
Cash and cash equivalents at end of year $ 63,416 $ 2,516 $ 5,390
========== ========== ==========
43
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE R - QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
Interest Net Interest Net Earnings per share
Income Income Income Basic Fully diluted
-------- ------------ -------- -------- -------------
2006
First quarter $ 12,244 $ 6,856 $ 1,946 $ 0.33 $ 0.31
Second quarter 13,062 6,956 2,056 0.34 0.33
Third quarter 13,870 6,846 1,565 0.26 0.25
Fourth quarter 14,710 7,344 2,252 0.30 0.29
2005
First quarter $ 9,892 $ 6,580 $ 1,765 $ 0.30 $ 0.28
Second quarter (1) 10,638 6,665 1,412 0.24 0.23
Third quarter 11,334 7,053 2,079 0.35 0.33
Fourth quarter 11,991 7,154 2,254 0.38 0.36
(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 to net income of $459,000, which decreased
basic earnings per share and diluted earnings per share by $.08 and $.07,
respectively.
44
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE S - ACQUISITION
On January 4, 2007, the Corporation acquired the Fidelity Financial Corporation
of Michigan (Fidelity) for $70,500,000 in cash. As of January 4, 2007, the
assets and liabilities of Fidelity at acquisition and net income derived from
those assets and liabilities since the acquisition have been consolidated into
the Bank. Fidelity was founded in 1973 and has its main office in Birmingham,
Michigan with single branch offices in Bloomfield Township, Michigan and Bingham
Farms, Michigan and four branch offices in Southfield, Michigan. As of December
31, 2006, Fidelity had total assets of $220,419,000, gross loans of $179,553,000
and total deposits of $187,547,000.
The acquisition of Fidelity will enable the Corporation to build a competitive
presence in Oakland County for the Bank's loan and deposit products. Management
expects to build upon Fidelity's reputation and continue to increase the Bank's
presence in Oakland County, while decreasing operating expenses by utilizing the
infrastructure and operational capabilities already in place at the Bank.
The acquisition has been accounted for using the purchase method of accounting,
and accordingly, the purchase price has been allocated to the tangible and
identified intangible assets purchased and the liabilities assumed based upon
the estimated fair values at the date of acquisition. There are refinements in
the process of allocating the purchase price that have not been entirely
completed. Identified intangible assets and purchase accounting fair value
adjustments are being amortized under various methods over the expected lives of
the corresponding assets and liabilities. Goodwill will not be amortized, but
will be reviewed for impairment on an annual basis. Goodwill and other
intangible assets are tax deductible over 15 years. Currently, identified
intangible assets subject to amortization are $11,200,000. Goodwill aggregates
to $25,700,000.
The following table presents pro forma information for the Corporation including
the acquisition of Fidelity for the year ended December 31, 2006 as if the
acquisition had occurred at the beginning of 2006. The pro forma financial
information does not purport to be indicative of the operating results or
financial position that would have actually occurred or existed if the
transactions had occurred on the dates indicated, nor is it indicative of our
future operating results or our financial position
45
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2006, 2005 AND 2004
NOTE S - ACQUISITION (Continued)
(In thousands, except share and per share data)
Dearborn Fidelity Adjustments Combined
-------- -------- ----------- ----------
Interest income $53,886 $16,096 ($441) $ 69,541
Interest expense 25,884 4,840 52 30,776
------- ------- ------- ----------
Net interest income 28,002 11,256 (493) 38,765
Provision for loan loss 943 400 -- 1,343
------- ------- ------- ----------
Net interest income
after provision
for loan losses 27,059 10,856 (493) 37,422
Non-interest income 925 1,214 -- 2,139
Non-interest expense 16,225 7,623 1,199 25,047
------- ------- ------- ----------
Income before income
tax provision 11,759 4,447 (1,692) 14,514
Income tax provision 3,940 -- 937 4,877
------- ------- ------- ----------
Net income $ 7,819 $ 4,447 ($2,629) $ 9,637
======= ======= ======= ==========
Basic earnings per share $ 1.07
Diluted earnings per share $ 1.03
Weighted average shares
outstanding - basic 9,028,878
Weighted average shares
outstanding - diluted 9,328,726
The adjustments related to net interest income are due to financing costs
related to funding the acquisition. The adjustments related to non interest
income are entirely due to the amortization of intangible assets and additional
depreciation expense. The adjustments related to income tax provision are due to
the income tax effects of the other adjustments and the income taxes on
Fidelity's 2006 pre-tax income. Fidelity was a Subchapter S Corporation and did
not record income tax expense.
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPANY OVERVIEW
Dearborn Bancorp, Inc. was incorporated as a Michigan business corporation on
September 30, 1992. The Corporation was formed to acquire all of the Bank's
issued and outstanding stock and to engage in the business of a bank holding
corporation under the Bank Holding Company Act of 1956, as amended (the "Act").
Community Bank of Dearborn (the "Bank"), a Michigan banking corporation,
commenced business on February 28, 1994 in Dearborn, Michigan. The Bank is the
only commercial bank headquartered in Dearborn, Michigan and offers a full line
of loan and deposit products and services. The Bank offers excellent customer
service to its loan and deposit customers and maintains strong relationships
with the communities served by the Bank. The Bank emphasizes strong loan
quality, excellent customer service and efficient operations in order to
maximize profitability and shareholder value.
Subsequent to the commencement of business in Dearborn, Michigan in 1994, the
Bank opened five additional offices in Wayne County, Michigan. Since 2001, the
Bank two offices in Macomb County, Michigan and in 2003, the Bank opened an
office in Oakland County, Michigan.
In 2004, the Corporation acquired the Bank of Washtenaw from Pavillion Bancorp.
The Bank of Washtenaw's three banking offices, all of which are located in
Washtenaw County, Michigan were successfully consolidated into the Community
Bank of Dearborn. The Bank currently operates twelve banking offices in Wayne,
Macomb, Oakland and Washtenaw Counties, Michigan.
In September of 2006, the Corporation signed a definitive agreement to acquire
Fidelity Financial Corporation of Michigan (Fidelity), a commercial bank with
seven offices in Oakland County, Michigan. The acquisition will significantly
expand the Bank's presence in Oakland County, Michigan. Management believes that
the acquisition will be beneficial to the Bank's customers and the Corporation's
shareholders. This acquisition was completed on January 4, 2007.
The Bank will open a banking office in Shelby Township, Michigan during the
second quarter of 2007. A list of banking offices is shown on the following
page.
While maintaining high asset quality and improving profitability, the Bank has
sustained substantial asset growth. The expansion of our commercial banking
department has been a primary element in the Bank's asset growth. This growth
has been funded primarily by deposits. The Corporation expects to continue its
growth in the Metropolitan Detroit market and look for additional acquisitions
as they become available.
The Corporation's earnings depend primarily on net interest income. Management
strives to maximize net interest income through monitoring the economic and
competitive environment and making appropriate adjustments in the
characteristics and pricing of our products and services.
Other factors that contribute significantly to our earnings are the maintenance
of strong asset quality and efficient operations. Management continually
monitors the quality of the loan portfolio and the impact of the economic and
competitive environment and takes appropriate measures to maintain high asset
quality. Management does not expect the acquisition of Fidelity to have a
significant impact on the Bank's asset quality.
The Bank's market area consists primarily of the Metropolitan Detroit area. This
is a large real estate market and the Bank's loan portfolio accounts for less
than one percent of this market. The Detroit real estate market has been
negatively impacted by the unfavorable economic conditions in the State of
Michigan. Despite the local economy and its impact on certain industries, many
local industries and economies are prospering. The Bank has maintained strong
asset quality in this environment by enforcing strong underwriting guidelines
and utilizing a diligent loan review process.
47
Net income during the year ended December 31, 2006 was affected by a compression
in net interest income compared with the same period in 2005. This was the
result of competitive pricing pressure in both loans and deposit generation.
Additionally, the continuation of a flat treasury yield has resulted in lower
interest rates spreads than in other reporting periods.
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
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
48
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 incurred losses 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 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 the impact of current economic conditions on
borrowers' ability to repay their loans.
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 current loss exposure 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.
49
RESULTS OF OPERATIONS
2006 Compared to 2005. The Corporation reported net income of $7,819,000 in 2006
compared to $7,510,000 in 2005, an increase of $309,000 or 4%. The Corporation's
increase in net income was primarily due to an increase in net interest income
and the $696,000 impairment on securities in 2005, partially offset by increases
in non-interest expense.
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.
NET INTEREST INCOME
2006 Compared to 2005. Net interest income for the year ended December 31, 2006
was $28,002,000 compared to $27,452,000 for the year ended December 31, 2005, an
increase of $550,000 or 2%. 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 3.07% in
2006 from 3.63% in 2005, a decrease of 56 basis points. The decrease in the net
interest rate spread was due to liability costs increasing faster than asset
yields. The Corporation's net interest margin decreased to 3.80% in 2006 from
4.14% in 2005.
Average interest earning assets grew by $75.5 million between the periods while
interest bearing liabilities grew by $64.0 million. While management is
continually reviewing spreads and margins, future increases in the net interest
margin are primarily expected from continued volume growth in the higher
yielding loan portfolio and the diversification of the Bank's deposit structure.
The primary source of funding for the expected growth in the loan portfolio is
deposit growth. During 2007, the Corporation is expecting the net interest rate
spread and net interest rate margin to increase slightly as a result of
diversification of the deposit mix and an expected decrease in short-term
interest rates.
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.
50
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, 2006 Year ended December 31, 2005
------------------------------------ -----------------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
---------- --------- ------- ---------- --------- -------
Assets
Interest-bearing deposits with
banks $ 3,333 $ 158 4.74% $ 3,675 $ 111 3.02%
Federal funds sold 11,682 573 4.90% 7,783 242 3.11%
Investment securities, available
for sale 19,555 893 4.57% 19,673 598 3.04%
Loans 703,590 52,321 7.44% 631,491 42,904 6.79%
---------- --------- ---- ---------- --------- ----
Sub-total earning assets 738,160 53,945 7.31% 662,622 43,855 6.62%
Other assets 28,876 30,220
---------- ----------
Total assets $ 767,036 $ 692,842
========== ==========
Liabilities and stockholders' equity
Interest bearing deposits $ 568,095 $ 23,447 4.13% $ 506,228 $ 14,427 2.85%
Other borrowings 43,694 2,437 5.58% 41,564 1,976 4.75%
---------- --------- ---- ---------- --------- ----
Sub-total interest bearing
liabilities 611,789 25,884 4.23% 547,792 16,403 2.99%
Non-interest bearing deposits 57,647 63,164
Other liabilities 2,224 2,305
Stockholders' equity 95,376 79,581
---------- ----------
Total liabilities and stockholders'
equity $ 767,036 $ 692,842
========== ==========
Tax equivalent net interest income $ 28,061 $ 27,452
========= =========
Net interest rate spread 3.08% 3.63%
==== ====
Net interest margin on earning
assets 3.80% 4.14%
==== ====
Tax equivalent adjustment (59) --
--------- ---------
Net interest income $ 28,002 $ 27,452
========= =========
51
(continued)
Year Ended December 31, 2004
---------------------------------
Average Average
(In thousands) Balance Interest Rate
--------- -------- --------
Assets
Interest-bearing deposits with banks $ 9,305 $ 129 1.39%
Federal funds sold 10,602 161 1.52%
Investment securities, available for sale 23,122 460 1.99%
Loans 460,840 29,040 6.30%
--------- -------- ----
Sub-total earning assets 503,869 29,790 5.91%
Other assets 19,715
---------
Total assets $ 523,584
=========
Liabilities and stockholders' equity
Interest bearing deposits $ 393,004 $ 8,013 2.04%
Other borrowings 30,634 1,396 4.56%
--------- -------- ----
Sub-total interest bearing liabilities 423,638 9,409 2.22%
Non-interest bearing deposits 45,456
Other liabilities 2,339
Stockholders' equity 52,151
--------
Total liabilities and stockholders' equity $ 523,584
=========
Tax equivalent net interest income $ 20,381
========
Net interest rate spread 3.69%
====
Net interest margin on earning assets 4.04%
====
Tax equivalent adjustment --
--------
Net interest income $ 20,381
========
52
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.
2006/2005 2005/2004
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 ($ 16) $ 63 $ 47 ($ 94) $ 76 ($ 18)
Federal funds sold 191 140 331 (3) 84 81
Investment securities, available
for sale (5) 300 295 14 124 138
Loans 5,361 4,056 9,417 12,728 1,136 13,864
------- ------- -------- -------- -------- --------
Total earning assets $ 5,531 $ 4,559 $ 10,090 $ 12,645 $ 1,420 $ 14,065
======= ======= ======== ======== ======== ========
Liabilities
Interest bearing deposits $ 2,553 6,467 $ 9,020 $ 4,820 1,594 $ 6,414
Other borrowings 119 342 461 550 30 580
------- ------- -------- -------- -------- --------
Total interest bearing liabilities $ 2,672 $ 6,809 $ 9,481 $ 5,370 $ 1,624 $ 6,994
======= ======= ======== ======== ======== ========
Tax equivalent net interest
income $ 609 $ 7,071
======== ========
Net interest rate spread (0.55%) (0.06%)
======== ========
Net interest margin on earning
assets (0.34%) 0.10%
======== ========
PROVISION FOR LOAN LOSSES
2006 Compared to 2005. The provision for loan losses was $943,000 in 2006,
compared to $1,081,000 in 2005, a decrease of $138,000 or 13%. The decrease was
primarily due to a decrease in net charge-offs during 2006. While loan growth
increased to 15% during 2006 compared to 12% during 2005, the Bank recorded net
recoveries of $24,000 compared to net charge-offs of $157,000 during 2005.
The provision for loan losses is based upon management's assessment of relevant
factors, including types and amounts of non-performing loans, historical loss
experience on such types of loans, the relevant change in the size and mix of
the loan portfolio and the impact of current economic conditions on borrowers'
ability to repay their loans.
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.
53
NON-INTEREST INCOME
2006 Compared to 2005. Non-interest income was $925,000 in 2006, compared to
$505,000 in 2005, an increase of $420,000 or 83%. The increase was primarily due
to a write-down and subsequent loss on the sale of a single issue of FHLMC
preferred stock during 2005. This loss is discussed further in the following
paragraph. When the write-down and subsequent sale of the FHLMC preferred stock
is excluded from non-interest income, non-interest income during 2006 is
$320,000 or 26% lower than non interest income in 2005. This decrease was
primarily due to a decrease in the gain on sale of loans and an increase in the
loss on the sale of real estate. Gain on the sale of loans decreased from
$361,000 in 2005 to $145,000 in 2006, due to a decrease in loans sold during
2006. The Corporation recorded loss on the sale of real estate owned of $103,000
during 2006, compared to a gain on the sale of real estate of $92,000 during
2005.
2005 Compared to 2004. Non-interest income was $505,000 in 2005, compared to
$1,065,000 in 2004, a decrease of $560,000 or 53%. 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 $1,245,000,
which was an increase of $180,000 or 17% from 2004.
NON-INTEREST EXPENSE
2006 Compared to 2005. Non-interest expense was $16,225,000 in 2006 compared to
$15,499,000 in 2005, an increase of $726,000 or 5%. The largest component of the
change in non-interest expense was salaries and employee benefits which amounted
to $10,288,000 in 2006 compared to $9,402,000 in 2005, an increase of $886,000
or 9%. As of December 31, 2006, the number of full time equivalent employees was
157 compared to 151 as of December 31, 2005.
2005 Compared to 2004. Non-interest expense was $15,499,000 in 2005 compared to
$11,700,000 in 2004, an increase of $3,799,000 or 32%. The largest component of
the change in non-interest expense was salaries and employee benefits which
amounted to $9,402,000 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.
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.
INCOME TAX PROVISION
2006 Compared to 2005. The income tax expense was $3,940,000 in 2006 compared to
$3,867,000 in 2005, an increase of $73,000 or 2%. The increase was primarily due
to the increase in income before federal income tax as the effective tax rate
remained fairly stable. The effective tax rate declined to 33.5% in 2006 from
34% in 2005 due to short term investments in tax free securities during the
fourth quarter of 2006. Refer to Note K of the Notes to Consolidated Financial
Statements for additional information.
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.
54
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2006 AND DECEMBER 31, 2005
Assets. Total assets at December 31, 2006 were $855,931,000 compared to
$706,497,000 at December 31, 2005, an increase of $149,434,000 or 21%. The
increase was primarily due to increases in loans and federal funds sold. The
increase in federal funds sold was primarily due to the funds received from the
issuance of 2,918,250 shares of common stock. Funds received from the issuance
of common stock amounted to $55,100,000. These funds were utilized to fund the
acquisition of Fidelity Financial Corporation of Michigan on January 4, 2007.
Securities Available for Sale. Total securities available for sale, at December
31, 2006 were $5,878,000 compared to $17,153,000 at December 31, 2005, a
decrease of $11,275,000 or 66%. During 2006, the Corporation sold $97.9 million
in securities and $12.8 million in securities were called or matured. $77.9
million or 80% of the securities sold during 2006 were securities that were
invested for a short duration with funds from the sale of common stock on
November 4, 2007. These securities were sold on December 29, 2006 and the funds
from the sale were utilized to partially fund the acquisition of Fidelity on
January 4, 2007. The Bank's portfolio of securities available for sale has an
amortized cost and a fair value of $5.9 million. The securities at December 31,
2006 are as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
US Treasury securities $ 4,982 $ -- ($ 14) $ 4,968
Municipal bonds 497 4 -- 501
Mortgage backed securities 407 2 -- 409
----------- ---------- ---------- -----------
Totals $ 5,886 $ 6 ($ 14) $ 5,878
=========== ========== ========== ===========
A maturity and repricing schedule of the securities portfolio at December 31,
2006 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 $ 4,968 4.79% $ -- -- $ -- -- $ 4,968
Municipal securities 80 3.70% 421 3.82% -- -- 501
Mortgage backed
securities -- -- 242 5.70% 167 6.13% 409
--------- ---- --------- ---- --------- ---- --------
Totals $ 5,048 $ 663 $ 167 $ 5,878
========= ========= ========= ========
The entire portfolio has a net unrealized loss of $8,000. 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.
55
Loans. Total loans at December 31, 2006 were $756,420,000 compared to
$657,037,000 at December 31, 2005, an increase of $99,383,000 or 15%. The
components of the outstanding balances for the years ended December 31, are as
follows (in thousands):
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
Consumer loans $ 32,282 $ 35,041 $ 42,149 $ 25,200 $ 22,170
Commercial, financial, & other 130,056 110,805 129,103 68,922 46,187
Commercial real estate construction 137,596 118,358 72,286 50,087 30,083
Commercial real estate mortgages 410,829 345,536 296,634 208,305 139,243
Residential real estate mortgages 45,657 47,297 47,090 48,444 29,839
---------- ---------- ---------- ---------- ----------
$ 756,420 $ 657,037 $ 587,262 $ 400,958 $ 267,522
========== ========== ========== ========== ==========
During 2006, loans increased 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 decrease in residential real
estate mortgages was primarily due to the decrease in demand for residential
real estate.
The Bank expects the percentage of total commercial loans to increase as a
percentage of the loan portfolio in 2007 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.
56
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, 2006 is listed below (in thousands):
Within Three to One to After
Three Twelve Five Five
Months Months Years Years Total
---------- ---------- ---------- ---------- ----------
Consumer loans $ 24,899 $ 675 $ 6,218 $ 426 $ 32,218
Commercial, financial & other 72,824 10,692 40,503 6,037 130,056
Commercial real estate construction 110,800 11,845 10,025 2,416 135,086
Commercial real estate mortgages 51,813 18,842 320,941 15,160 406,756
Residential real estate mortgages 2,900 6,991 27,332 9,521 46,744
---------- ---------- ---------- ---------- ----------
$ 263,236 $ 49,045 $ 405,019 $ 33,560 750,860
========== ========== ========== ==========
Non-accrual loans 5,560
----------
Total loans $ 756,420
==========
Loans at fixed interest rates $ 22,330 $ 41,990 $ 372,532 $ 33,560 $ 470,412
Loans at variable interest rates 240,906 7,055 32,487 -- 280,448
---------- ---------- ---------- ---------- ----------
$ 263,236 $ 49,045 $ 405,019 $ 33,560 750,860
========== ========== ========== ==========
Non-accrual loans 5,560
----------
Total loans $ 756,420
==========
Variable rate loans comprise 37% 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.
The following is a summary of non-performing and problem loans (in thousands):
2006 2005 2004
-------- -------- --------
Troubled debt restructuring $ -- $ -- $ --
Over 90 days past due 2,101 189 143
Non-accrual loans 5,560 984 2,956
-------- -------- --------
Total non performing loans $ 7,661 $ 1,173 $ 3,099
======== ======== ========
57
Non-accrual loans at December 31, 2006 were $5,560,000. The increase in
non-accrual loans during the year ended December 31, 2006 is primarily due to
the downgrading of one commercial real estate construction and eight commercial
real estate mortgage loans with a balance of $4,843,000 to non-accrual status.
An impairment analysis was completed on these loans resulting in a specific
allocation of the allowance for loan losses to these loans of $688,000 at
December 31, 2006. We continue to work to collect these loans as they are all
secured by real estate which we believe will have significant value, even in
liquidation.
Allowance for Loan Losses. The allowance for loan losses at December 31, 2006
was $7,775,000 compared to $6,808,000 at December 31, 2005, an increase of
$967,000 or 14%. The increase was primarily to provide for the growth in the
loan portfolio during 2006. Transactions in the allowance for loan losses for
the years ended December 31, are as follows (in thousands):
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
Balance, beginning of year $ 6,808 $ 5,884 $ 4,314 $ 2,875 $ 1,922
Allowance on loans acquired -- -- 184 -- --
Charge-offs:
Consumer loans 24 112 31 38 32
Commercial, financial & other 139 169 -- 141 141
Commercial real estate construction -- -- -- 50 --
Commercial real estate mortgages 36 86 -- 124 --
Residential loans 38 -- 100 -- --
Recoveries:
Consumer loans 17 37 12 13 9
Commercial, financial & other 218 131 44 30 65
Commercial real estate construction -- -- -- 50 --
Commercial real estate mortgages 26 10 61 -- --
Residential loans -- 32 -- --
-------- -------- -------- -------- --------
Net charge-offs (24) 157 14 260 99
Additions charged to operations 943 1,081 1,400 1,699 1,052
-------- -------- -------- -------- --------
Balance at end of period $ 7,775 $ 6,808 $ 5,884 $ 4,314 $ 2,875
======== ======== ======== ======== ========
Allowance to total loans 1.03% 1.04% 1.00% 1.08% 1.07%
======== ======== ======== ======== ========
Net Charge-offs to average loans 0.00% 0.02% 0.00% 0.08% 0.04%
======== ======== ======== ======== ========
The increase in the allowance for loan losses was based upon management's
assessment of relevant factors, including types and amounts of non-performing
loans, historical 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 expected impact of current economic conditions on
borrowers' ability to repay their loans.
58
The allocation of the allowance for loan losses as of December 31, 2006 is as
follows (in thousands):
Total
------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
Consumer loans $ 470 $ 521 $ 551 $ 337 $ 282
Commercial, financial, & other 1,553 1,901 1,653 972 660
Commercial real estate construction 1,582 1,371 976 639 312
Commercial real estate mortgages 3,772 2,700 2,302 1,899 1,344
Residential real estate mortgages 398 315 402 467 277
-------- -------- -------- -------- --------
$ 7,775 $ 6,808 $ 5,884 $ 4,314 $ 2,875
======== ======== ======== ======== ========
Percent of allowance for loan losses in each
category to total allowance for loan losses
------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- ------ ------- -------
Consumer loans 6.05% 7.65% 9.36% 7.81% 9.81%
Commercial, financial, & other 19.97% 27.92% 28.09% 22.53% 22.96%
Commercial real estate construction 20.35% 20.14% 16.59% 14.81% 10.85%
Commercial real estate mortgages 48.51% 39.66% 39.12% 44.02% 46.75%
Residential real estate mortgages 5.12% 4.63% 6.83% 10.83% 9.63%
------ ------ ------ ------ ------
100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
Percent of loans in each category to total loans
------------------------------------------------
2006 2005 2004 2003 2002
------ ----- ------ ------ ------
Consumer loans 4.27% 4.63% 7.17% 6.27% 8.29%
Commercial, financial, & other 17.19% 14.65% 21.97% 17.22% 17.26%
Commercial real estate construction 17.89% 15.65% 12.30% 12.55% 11.25%
Commercial real estate mortgages 54.31% 45.68% 50.54% 51.92% 52.05%
Residential real estate mortgages 6.34% 6.25% 8.01% 12.04% 11.15%
------ ----- ------ ------ ------
100.00% 86.86% 100.00% 100.00% 100.00%
====== ===== ====== ====== ======
The increase in the allocation of the allowance for loan losses to commercial
real estate construction and commercial real estate mortgage loans at December
31, 2006 compared to December 31, 2005 is primarily due to our impairment
evaluation of the nine new non-accrual loans discussed earlier. This increase
was partially offset by a decrease in the allocation of the allowance for loan
losses to commercial, financial and other loans due primarily to smaller
required impairment allocations for several commercial loans and by smaller
allocations to consumer and residential real estate loans due primarily to lower
loan volumes and lower delinquency levels.
59
Bank Premises and Equipment. Bank premises and equipment at December 31, 2006
were $14,293,000 compared to $13,792,000 at December 31, 2005, an increase of
$501,000 or 4%. The increase was mainly due to upgrades in technology instituted
throughout the Bank.
Real Estate Owned. Real estate owned at December 31, 2006 was $52,000, compared
to $663,000 at December 31, 2005, a decrease of $611,000 or 92%. Real estate
owned at December 31, 2006 is comprised of one residential property with an
appraised value of $55,000. The Bank expects to complete the sale of this
property during 2007. The Corporation recorded loss on the sale of real estate
of $103,000 during 2006. All of the properties that comprised real estate owned
at December 31, 2005 were sold during 2006.
Goodwill and Other Intangible Assets. Goodwill and other intangible assets were
$7,514,000 at December 31, 2006, compared to $7,764,000 at December 31, 2005, a
decrease of $250,000 or 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,
2006, the core deposit intangible and borrower relationship intangible amounted
to $627,000 and $1,414,000, 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, 2006.
Accrued Interest Receivable. Accrued interest receivable at December 31, 2006
was $3,337,000 compared to $2,586,000 at December 31, 2005, an increase of
$751,000 or 29%. The increase was primarily due to increase in the size and
yield of the loan portfolio.
Other Assets. Other assets at December 31, 2006 were $3,071,000 compared to
$2,521,000 at December 31, 2005, an increase of $550,000 or 22%. The decrease
was largely due to a decrease in the Corporation's deferred tax asset.
60
Deposits. Total deposits at December 31, 2006 were $633,216,000 compared to
$582,438,000 at December 31, 2005, an increase of $50,778,000 or 9%. The
components of the outstanding balances and percentage increase in deposits from
2005 to 2006 are as follows (in thousands):
December 31, 2006 December 31, 2005
--------------------- --------------------- Percent
Balance Percent Balance Percent Increase/(Decrease)
---------- ------- ---------- ------- ----------------------
Non-interest bearing:
Demand $ 53,065 8.38% $ 59,652 10.24% (11.04%)
---------- ----------
Interest bearing:
Checking $ 62,770 9.91% $ 13,413 2.30% 367.98%
Money market 14,289 2.26% 26,514 4.55% (46.11%)
Savings 42,169 6.66% 69,503 11.93% (39.33%)
Time, under $100,000 130,898 20.67% 151,038 25.94% (13.33%)
Time, $100,000 and over 330,025 52.12% 262,318 45.04% 25.81%
---------- ------ ---------- ------ ------
580,151 91.62% 522,786 89.76% 10.97%
---------- ------ ---------- ------ ------
$ 633,216 100.00% $ 582,438 100.00% 8.72%
========== ====== ========== ====== ======
The increase in deposits was primarily due to growth in interest-bearing
checking deposits. During 2006, the Bank completed an annual birthday
celebration in March 2006, a time deposit promotion that featured the Bank's
seven month certificate of deposit product and another promotion that introduced
the Bank's High Performance Checking 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 continued to employ 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 has
continued 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, 2006 were $115.4 million compared to $85.2
million at December 31, 2005. There were 31 and 28 entities with public funds on
deposit at December 31, 2006 and December 31, 2005, respectively. The average
term of time deposits invested with the Bank by public units was 87 and 95 days
at December 31, 2006 and 2005, respectively. Brokered deposits were $56.0
million with an average rate of 4.59% at December 31, 2006, compared to $45.1
million with an average rate of 3.79% at December 31, 2005.
Final maturities of total time deposits are as follows (in thousands):
$100,000 and over Less than $100,000 Total
----------------- ------------------ ----------
2007 $ 289,688 $ 110,215 $ 399,903
2008 16,031 8,166 24,197
2009 7,835 2,804 10,639
2010 6,580 2,493 9,073
2011 9,891 7,220 17,111
----------------- ------------------ ----------
Totals $ 330,025 $ 130,898 $ 460,923
================= ================== ==========
61
The following is a summary of the distribution and weighted average interest
rate of deposits at December 31, 2006 (in thousands):
2006 2005
----------------------- ----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
---------- -------- ---------- --------
Non-interest bearing:
Demand $ 53,065 -- $ 59,652 --
---------- ----------
Interest bearing:
Checking $ 62,770 3.35% $ 13,413 1.01%
Money market 14,289 2.56% 26,514 2.43%
Savings 42,169 1.73% 69,503 1.90%
Time, under $100,000 130,898 4.59% 151,038 3.70%
Time, $100,000 and over 330,025 5.03% 262,318 3.90%
---------- ----------
580,151 522,786
---------- ----------
$ 633,216 $ 582,438
========== ==========
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.
Federal Funds Purchased. Federal funds purchased were $37,300,000 at December
31, 2006 compared to $0 at December 31, 2005. Federal funds purchased are
utilized as a short term funding source for the Bank. Management utilized this
short term source of liquidity at December 31, 2006 primarily because of the
likelihood of decreasing interest rates during 2007 and 2008 and the expected
utilization of additional liquidity sources after the acquisition of Fidelity on
January 4, 2007.
Federal Home Loan Bank Advances. Federal Home Loan Bank advances at December 31,
2006 amounted to $25,561,000 compared to $25,588,000 at December 31, 2005.
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 I of
the Notes to the Consolidated Financial Statements for additional information.
Other Borrowings. Other borrowings were $619,000 at December 31, 2006 compared
to $1,615,000 at December 31, 2005, a decrease of $996,000 or 62%. 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 $516,000 at December 31, 2006 compared
to $960,000 at December 31, 2005, a decrease of $444,000 or 46%. The decrease
was primarily due to a decrease in accrued expenses.
62
Accrued Interest Payable. Accrued interest payable at December 31, 2006 was
$3,734,000 compared to $1,683,000 at December 31, 2005, an increase of
$2,051,000 or 122%. The increase was due to the increase in the volume and cost
of interest-bearing liabilities during 2006.
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. Please refer to Note J of the Notes to the Consolidated
Financial Statements for additional information.
CAPITAL
Stockholders' equity at December 31, 2006 was $144,985,000 compared to
$84,213,000 as of December 31, 2005, an increase of $60,772,000 or 72%. The
Corporation completed a stock offering during the fourth quarter of 2006. The
Corporation sold 2,918,250 shares of its common stock at $20.00 per share. The
net proceeds from the stock offering were approximately $55,131,000.
At December 31, 2006 and 2005, the Bank and Corporation exceeded all applicable
regulatory capital requirements as described in Note N 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.
63
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, 2006 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 $ 64,198 $ -- $ -- $ -- $ 64,198
Interest bearing deposits
with Banks 8 -- -- -- 8
Mortgage loans held for
sale 1,823 -- -- -- 1,823
Securities available
for sale 80 4,968 662 168 5,878
Federal Home Loan Bank
stock 1,288 -- -- -- 1,288
Total loans, net of
non-accrual 263,236 49,045 405,019 33,560 750,860
-------- ---------- -------- -------- --------
Total earning assets 330,633 54,013 405,681 33,728 824,055
Interest bearing liabilities
Total interest bearing
deposits 285,080 234,051 61,020 -- 580,151
Federal Home Loan Bank
advances -- 10,000 15,561 -- 25,561
Other Borrowings 619 -- -- -- 619
Subordinated debentures 10,000 -- -- -- 10,000
-------- ---------- -------- -------- --------
Total interest bearing
liabilities 295,699 244,051 76,581 -- 616,331
-------- ---------- -------- -------- --------
Net asset (liability)
funding gap 34,934 (190,038) 329,100 33,728 $207,724
-------- ---------- -------- -------- ========
Cumulative net asset
(liability) funding gap $ 34,934 ($ 155,104) $173,996 $207,724
======== ========== ======== ========
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.
64
We conducted an interest rate simulation as of December 31, 2006, 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 $ 221 1.60%
+ 200 Basis Points 48 0.35%
+ 100 Basis Points (199) -1.44%
- - 100 Basis Points (419) -3.04%
- - 200 Basis Points (454) -3.29%
- - 300 Basis Points (519) -3.76%
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, 2006 (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 $ 619 $ -- $ -- $ -- $ 619
Certificates of deposit 399,903 34,835 26,185 -- 460,923
Long-term borrowings 5,561 20,000 -- -- 25,561
Lease commitments 582 1,084 878 -- 2,544
Subordinated debentures -- -- -- 10,000 10,000
-------- -------- ------- ------- --------
Totals $406,665 $ 55,919 $27,063 $10,000 $499,647
======== ======== ======= ======= ========
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 $116,327 $25,023 $9,066 $12,467 $162,883
Standby letters of credit 5,195 3,017 -- -- 8,212
-------- ------- ------ ------- --------
Totals $121,522 $28,040 $9,066 $12,467 $171,095
======== ======= ====== ======= ========
65
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.
The Bank has implemented the following technologies:
ATM Banking
In Touch Voice Response Telephone Banking
Netteller Internet Banking
Netteller Cash Management
Vertex Teller Automation
Streamline Platform Automation
During 2007, the Bank plans to implement the following technologies:
Netteller Bill Pay
Remote Deposit Capture
Check 21
Electronic Cash Letter Delivery
66
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 2006, the Bank provided the following local organizations with
financial support or personal involvement:
Agape Christian Academy, Canton
American Arab Chamber of Commerce
American Red Cross
Ann Arbor Board of Realtors
Ann Arbor Chamber of Commerce
Ann Arbor Symphony Orchestra
Auburn Hills Chamber of Commerce
Canton Chamber of Commerce
Canton Community Foundation
Canton Exchange Club
Canton Liberty Festival
Canton Lion's Club
Canton Senior Safety Coalition
Canton Senior Center
Central Macomb Chamber of Commerce
Clinton Township Community Blood Drive
Clinton Township Senior Expo
Dearborn Animal Center
Dearborn Baseball
Dearborn Board of Realtors
Dearborn Chamber of Commerce
Dearborn Community Arts Council
Dearborn Elderfest
Dearborn Exchange Club
Dearborn Goodfellows
Dearborn Heights Chamber of Commerce
Dearborn Heights Lions Club
Dearborn Heights Park & Recreation
Dearborn Heights Spirit Festival
Dearborn Homecoming
Dearborn Kiwanis
Dearborn Optimist Club
Dearborn Police Officers Charity
Dearborn Rotary Club
Dearborn Senior Center
Dearborn Symphony Orchestra
Dexter Area Chamber of Commerce
Divine Child School
Downriver Senior Olympics
Festival of Trees
Garden City Hospital Foundation
Garden Club of Dearborn
Goodwill Industries of Greater Detroit
Henry Ford Community College Foundation
Junior League Goodwill
Mike Adray Memorial Foundation
Mount Clemens Lions Club
New Morning School
North Oakland Baseball Federation
Northville Chamber of Commerce
Oakwood Health Care Foundation
Orchestra Canton
Plymouth/Canton Schools
Plymouth Chamber of Commerce
Plymouth Community Arts Center
Royal Oak Police
Saint Joseph Mercy Saline Hospital
Saline Area Chamber of Commerce
Saline Celtic Festival
Schoolcraft College Foundation
Showcase Plymouth
Sig Krug Memorial Foundation
Southern Wayne County Chamber of Commerce
Southgate Senior Center
St. Joseph Hospital
Starfish Family Services
Trenton Rotary Club
Washtenaw Development Council
Washtenaw Housing Alliance
Washtenaw United Way
Washtenaw County 4-H Fair
Wayne County Treasurers Association
Wayne County 4-H Fair
West Washtenaw Business Association
Western Wayne Association of Realtors
Westland Foundation
Ypsilanti Chamber of Commerce
YWCA of Western Wayne County
67
DEARBORN BANCORP, INC.
DIRECTORS AND OFFICERS
DIRECTORS
MARGARET I. CAMPBELL
Retired, Manufacturing
JOHN E. DEMMER
Chairman of the Board and
Chief Executive Officer
Jack Demmer Ford, Inc.;
Jack Demmer Lincoln-Mercury, Inc. and
Jack Demmer Leasing
WILLIAM J. DEMMER
President
Jack Demmer Ford, Inc and
Jack Demmer Lincoln-Mercury, Inc.
MICHAEL V. DORIAN, JR.
Vice President
Mike Dorian Ford
DAVID HIMICK
Retired, Industrial Supply
DONALD G. KARCHER
Retired
Former Chairman of the Board
Karcher Agency, Inc.
BRADLEY F. KELLER
Retired
Former President
Braden Associates, Inc. and
MultiGard Properties, Ltd.
JEFFREY G. LONGSTRETH
Real Estate Broker
Century 21 - Curran & Christie
MIICHAEL J. ROSS
President and Chief Executive Officer
Community Bank of Dearborn
DR. ROBERT C. SCHWYN
Physician
Oaklane Medical
RONNIE J. STORY
President and Chief Executive Officer
Story Development Corp. and Story Brothers
Grading & Excavating
OFFICERS
JOHN E. DEMMER
Chairman of the Board
MICHAEL J. ROSS
President and Chief Executive Officer
JEFFREY L. KARAFA
Vice President, Treasurer and Secretary
68
COMMUNITY BANK OF DEARBORN
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
MARGARET I. CAMPBELL
Retired, Manufacturing
JOHN E. DEMMER
Chairman of the Board
Jack Demmer Ford, Inc.;
Jack Demmer Lincoln-Mercury, Inc. and
Jack Demmer Leasing
WILLIAM J. DEMMER
President
Jack Demmer Ford, Inc. and
Jack Demmer Lincoln Mercury
MICHAEL V. DORIAN, JR.
Vice President
Mike Dorian Ford
DAVID HIMICK
Retired, Industrial Supply
DONALD G. KARCHER
Retired
Former Chairman of the Board
Karcher Agency, Inc.
BRADLEY F. KELLER
Retired
Former President
Braden Associates, Inc. and
MultiGard Properties, Ltd.
JEFFREY G. LONGSTRETH
Real Estate Broker
Century 21 - Curran & Christie
MICHAEL J. ROSS
President and Chief Executive Officer
Community Bank of Dearborn
DR. ROBERT C. SCHWYN
Physician
Oaklane Medical
RONNIE J. STORY
President and C.E.O.
Story Development Corp. and Story Brothers
Grading & Excavating
EXECUTIVE OFFICERS
MICHAEL J. ROSS
President
Chief Executive Officer
JEFFREY L. KARAFA
Senior Vice President
CFO & Secretary
JOHN A. LINDSEY
Oakland Regional President
WARREN R. MUSSON
Senior Vice President
Head of Lending
STEPHEN C. TARCZY
Northeast Regional President
JEFFREY J. WOLBER
Senior Vice President
Head of Retail
69
COMMUNITY BANK OF DEARBORN
OFFICERS
FIRST VICE PRESIDENTS
BRUCE R. MARSH
First Vice President - Operations
TERRENCE R. O'NEIL
First Vice President - Credit
VICE PRESIDENTS
GARY W. AMES, JR.
Vice President & Controller
KEVIN A. BANK
Vice President - Commercial Loans
GAY M. BERG
Vice President - Branch Operations
DANIEL P. BROPHY
Vice President - Commercial Loans
KATHERINE T. BROWN
Vice President - Commercial Loans
DANIEL A. BZURA
Vice President - Branch Operations
RITA L. CAVATAIO
Vice President - Commercial Loans
GEORGE J. DEMOU
Vice President - Commercial Loans
DOUGLAS O. DUNKLEBERG
Vice President - Commercial Loans
CYNTHIA A. FRAGA
Vice President - Commercial Loans
LEE E. FREELAND
Vice President - Branch Operations
JIHAD A. HACHEM
Vice President - Commercial Loans
F. GLEN ISLAMI Vice
President - Compliance
WYNN C. MILLER
Vice President - Internal Audit
REGAN J. MORIN
Vice President - Commercial Loans
MARK M. PACITTO
Vice President - Commercial Loans
DON A. PLAISTED
Vice President - Commercial Loans
JAMES T. POWERS
Vice President - Product Support
DENNIS C. ROCHELEAU
Vice President & Cashier
GARY P. RUSCH
Vice President - Commercial Loans
WILLIAM M. SCHMIDT
Vice President - Commercial Loans
GREGORY M. SCHNEIDER
Vice President - Commercial Loans
STEVEN P. SLADE
Vice President - Consumer Loans
THOMAS R. THOMPSON
Vice President - Commercial Loans
RICHARD K. VALLEE
Vice President - Branch Operations
BRADY J. VIBERT
Vice President - Commercial Loans
JOHN W. WESTERHEIDE
Vice President - Commercial Loans
ASSISTANT VICE PRESIDENTS
DEBBY M. ASTERIOU
PATRICIA M. CARMONA
KAREN M. COVER
PATRICIA L. DANCIK
DONALD D. HARBIN
DAVID W. LESLIE
DENIS T. NISSLE
MIHAI PARASCA
ELIZABETH A. PIZZO
SUSAN M. VETTRAINO
PAMELA G. WILKS
MARIAN ZELEJI
FIRST LEVEL OFFICERS
STEPHENI C. AGUILA
STEPHEN T. BOLOVEN
MARK D. BOWERS
V. STACY BRANHAM
TERRENCE W. CARLSON
JANICE M. CONTRERA
DANIEL C. GILBERT
KAREN R. HENDERSHOT
ANGELA HSU
RICHARD T. JONES
SANDRA L. LETHBRIDGE
NADINE S. McMILLAN
DEBRA A. REED
PATRICK D. RUSSELL
TIMOTHY D. SIERPIEN
GAILE K. VIBERT
NOREEN F. WAGNER
CHARLES P. WASCZENSKI
CAROLYN A. WILKINS
70
COMMUNITY BANK OF DEARBORN
SUBSIDIARIES
COMMUNITY BANK INSURANCE AGENCY, INC.
Michael J. Ross, President
COMMUNITY BANK MORTGAGE, INC.
Michael J. Ross, 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.
71
COMMUNITY BANK OF DEARBORN
LOCATIONS
Ann Arbor / Eisenhower Banking Center
250 West Eisenhower Parkway, Suite 100
Ann Arbor, MI 48103
Phone: (734) 302-1481
Ann Arbor /Stadium Banking Center
2180 West Stadium Boulevard
Ann Arbor, MI 48103
Phone: (734) 302-9165
Auburn Hills Banking Center
3201 University Drive, Suite 180
Auburn Hills, MI 48326
Phone: (248) 364-9700
Bingham Farms Banking Center
30700 Telegraph
Bingham Farms, MI 48025
Phone: (248) 642-6757
Birmingham Banking Center
1040 E. Maple
Birmingham, MI 48009
Phone: (248) 642-1901
Bloomfield Township Banking Center
3681 W. Maple
Bloomfield Township, Mi 48301
Phone: (248) 642-1903
Canton Township Banking Center
1325 N. Canton Center Road
Canton, MI 48187
Phone: (734) 981-0022
Clinton Township Banking Center
19100 Hall Road
Clinton Township, MI 48038
Phone: (586) 416-4400
Clinton Township Regional Lending Center
45000 River Ridge Drive, Suite 110
Clinton Township, MI 48038
Phone: (586) 416-0200
Dearborn / Main Office Banking Center
22290 Michigan Avenue
Dearborn, MI 48124
(313) 274-1000
Dearborn Heights Banking Center
24935 West Warren Avenue
Dearborn Heights, MI 48127
Phone: (313) 724-0100
Dearborn Administration and
Regional Lending Center
1360 Porter Street, Suite 200
Dearborn, MI 48124
Phone: (313) 565-5700
Galleria Banking Center
200 Galleria Banking center
Southfield, MI 48034
North Park Plaza Banking Center
17117 W. Nine Mile Road
Southfield, Mi 48075
Phone: (248) 557-4477
Plymouth Township Banking Center
44623 Five Mile
Plymouth, MI 48170
Phone: (734) 454-1000
Saline Banking Center
450 East Michigan Avenue
Saline, MI 48176
Phone: (734) 429-3828
Shelby Township Banking Center
7755 23 Mile Road
Shelby Township, MI 48316
Phone:
Southgate Banking Center
12820 Fort Street
Southgate, MI 48195
Phone: (734) 284-3300
Southfield / Twelve Mile Banking Center
20000 Twelve Mile Road
Southfield, Mi 48076
Phone: (248) 559-5779
Travelers Tower Banking Center
26555 Evergreen
Southfield, Mi 48076
Phone: (248) 351-8311
Bank Operations Center
4000 Allen Road
Allen Park, MI 48101
Phone: (313) 381-3200
72
DEARBORN BANCORP, INC. COMMON STOCK
Dearborn Bancorp, Inc. common stock is listed on the Nasdaq Global 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 15, 2007, 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
QUARTERLY COMMON STOCK PRICE INFORMATION
High Low Close
------- ------- -------
2006
First quarter $ 22.68 $ 19.96 $ 20.41
Second quarter. 21.76 19.87 21.14
Third quarter 24.29 21.31 22.65
Fourth quarter 22.86 18.20 19.00
2005
First quarter $ 25.42 $ 21.39 $ 21.80
Second quarter 23.84 20.82 22.37
Third quarter 22.86 21.75 22.20
Fourth quarter 23.22 20.00 22.45
All per share amounts presented have been adjusted to reflect the issuance of
stock dividends.
73
CUMULATIVE STOCK PERFORMANCE GRAPH
The graph and table that follow show the cumulative return on the Common Stock
from December 31, 2001 through December 31, 2006. This return is compared in the
table and graph with the cumulative return over the same period with the
following two indices: (i) the All U.S. Nasdaq Index and (ii) the Nasdaq Bank
Index. The graph and table were prepared assuming that $100 was invested on
December 31, 2001 in the Common Stock and in each of the indices. Cumulative
total return on the Common Stock or the two indices equals the total increase
(decrease) in value since December 31, 2001. The stockholder returns shown on
the performance graph are not necessarily indicative of the future performance
of the Common Stock or any particular index.
COMPARISON OF CUMULATIVE TOTAL RETURN*
AMONG DEARBORN BANCORP, INC.,
THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ BANK INDEX
[PERFORMANCE GRAPH]
Dearborn Bancorp,
Inc. Nasdaq Stock Market (U.S.) Nasdaq Bank
----------------- -------------------------- -----------
12/31/2001 $ 100.00 $ 100.00 $ 100.00
12/31/2002 $ 154.73 $ 69.13 $ 102.37
12/31/2003 $ 209.32 $ 103.37 $ 131.69
12/31/2004 $ 338.33 $ 112.49 $ 150.71
12/31/2005 $ 316.60 $ 114.88 $ 147.23
12/31/2006 $ 267.96 $ 126.22 $ 165.21
74
PRINCIPAL MARKET MAKERS
Automated Trading Desk
Financial Services, LLC
11 E. Wall Street
Mount Pleasant, SC 29464
(843) 789-2000
B-Trade Services, LLC
1633 Broadway, 48th Floor
New York, NY 10019
(212) 448-5690
Citadel Derivatives Group, LLC
131 South Dearborn Street, 32nd Floor
Chicago, IL 60603
(312) 395-2100
Citigroup Global Markets, Inc.
388 Greenwich St., 38th Floor
New York, NY 10013
(212) 816-6000
FIG Partners, LLC
1175 Peachtree Street, NE
100 Colony Square, Suite 2250
Atlanta, GA 30361
(404) 601-7200
Hill Thompson Magid, & Co.
15 Exchange Place, Suite 800
Jersey City, NJ 07302
(201) 434-6900
Howe Barnes Hoefer & Arnett, Inc.
222 S. Riverside Plaza, 7th Floor
Chicago, Illinois 60606
(312) 655-3000
Knight Equity Markets, L.P.
545 Washington Boulevard
Jersey City, NJ 07310
(201) 557-6844
Oppenheimer & Co, Inc.
125 Broad Street, 16th Floor
New York, NY 10004
(212) 668-8000
Raymond James & Associates, Inc.
880 Carillon Parkway
St. Petersburg, FL 33716
(727) 567-1000
Ryan Beck & Co., Inc.
18 Columbia Turnpike, 1st Floor
Florham Park, NJ 07932
(973) 597-6000
Susquehanna Capital Group
401 City Line Avenue, Suite 220
Bala Cynwyd, PA 19004
(610) 617-2600
UBS Securities, LLC
677 Washington Blvd., 6th Floor
Stamford, CT 06901
(203) 719-1000
75
[LOGO]
DEARBORN BANCORP, INC.
1360 Porter Street
Dearborn, Michigan 48124
Phone: (313) 565-5700
www.cbdear.com