Exhibit 13
(DEARBORN BANCORP INC LOGO)
and its subsidiary
(FIDELITY BANK LOGO)
2007
ANNUAL REPORT
DEARBORN BANCORP, INC.
AND ITS SUBSIDIARY
FIDELITY BANK
CONTENTS
Corporate Information......................................................... 3
Chairman's and President's Letter to Stockholders............................. 4
Summary of Selected Financial Data............................................ 7
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......................................... 17
Notes to Consolidated Financial Statements.................................... 19
Management's Discussion and Analysis.......................................... 50
Dearborn Bancorp, Inc. Directors and Officers................................. 72
Fidelity Bank Directors and Executive Officers................................ 73
Fidelity Bank Officers........................................................ 74
Fidelity Bank Subsidiaries.................................................... 75
Investor Information.......................................................... 77
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, Fidelity Bank (the "Bank"). Dearborn Bancorp, Inc.
trades on the Nasdaq Global Market under the symbol "DEAR".
FIDELITY BANK
The Bank was incorporated as Community Bank of Dearborn 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. On January 4, 2007, the Corporation acquired Fidelity
Financial Corporation of Michigan and its subsidiary, Fidelity Bank. The
branches of Fidelity Bank were consolidated into the Bank immediately. On April
1, 2007, Community Bank of Dearborn was renamed Fidelity Bank.
The Bank opened a branch office in Shelby Township, Michigan on April 30, 2007
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 2007, the Bank renamed its website, www.fidbank.com. The Bank's customers are
able to execute transfers to their accounts and view their account information
and transactions. Commercial customers have the option of utilizing the cash
management module. This feature enables commercial customers to designate
multiple users, initiate wire transfers, process ACH transactions, perform stop
payments, and process federal tax payments. During its first year of operation,
over 1,000 users have signed up for online banking. The website also contains
product information regarding the Bank's loan and deposit products and the
Corporation's most recent financial information.
COMMUNITY BANK INSURANCE AGENCY, INC.
On August 19, 1997, the Bank formed Community Bank Insurance Agency, Inc. This
company conducts limited insurance-related activities and holds a minority
interest in 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. On January 1, 2008, the operations of the mortgage company were merged
into the Bank.
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:
Anyone who reads The Wall Street Journal or the Business Section of a
major daily newspaper knows that 2007 was a challenging year for the banking
industry in light of national problems with sub-prime mortgage lending, record
foreclosures and most particularly, the collapse of the housing market in
Southeast Michigan.
For some time, we have had a number of well-established residential
builders and developers among our commercial loan customers. Some of them have
encountered serious difficulties because they have been unable to sell completed
homes and the market for building lots has almost totally evaporated. This has
forced us to increase the provision for loan losses, recognize losses on some
loans, and assume ownership of properties that were collateral for loans we made
to finance residential construction and land development. That is the bad news.
The good news is that our exposure to the housing industry was not large
enough to jeopardize our excellent overall financial condition. We also did not
engage in sub-prime residential mortgage lending. While our profits for 2007
were down, we operated profitably for the full year. Our capital position
remains strong and bank regulators consider us "well-capitalized." We have
identified our problems, they are manageable, and we are dealing with them in a
systematic manner.
Our net income for 2007 was $3.1 million or $0.36 per fully diluted common
share. One year ago, we reported net income for 2006 of $7.8 million or $1.17
per diluted share. Over the course of the twelve-month period, total assets
increased 22.7 percent to over $1 billion. Total deposits went up 29.9 percent
to $822.6 million and total loans grew by 25.9 percent to $952.1 million. Much
of last year's growth was attributable to the acquisition of Fidelity Financial
Corporation of Michigan in January, 2007.
Stockholders' equity was $137.5 million at year-end, 5.1 percent less that
it had been one year earlier. This decline, however, was almost entirely due to
our Stock Repurchase Program. Under this program, we paid $10.8 million to
acquire 751,800 shares of our common stock. Then, we retired them. At December
31, 2007, Fidelity Bank's Tier 1 Capital to Risk Weighted Assets Ratio was
10.25% while the minimum required to be considered "well capitalized" is 6.00%.
By almost any measure, we are in excellent financial condition.
As we noted above, we have some problems with loans made to finance
residential construction and land development. Moreover, deteriorating economic
conditions in the markets we serve have affected other categories of loans as
well. We believe that all of these loans were conservatively underwritten and
well collateralized when they were made. However, the collapse of the housing
market in Southeast Michigan, together with the well-known problems of the
automotive industry, had a negative effect on loan quality that could not have
been reasonably foreseen or avoided.
During 2007, we provided $5.8 million for the allowance for loan losses
and recognized net charge-offs of $4.7 million. At year-end, the allowance for
loan losses was 1.12 percent of total loans. Net charge-offs for all of 2007
were 0.50 percent of average loans. At year-end, we had $19.0 million in
non-performing loans in our portfolio and $6.3 million in other real estate
owned. To put this in proper perspective, however, our total non-performing
assets of $25.3 million represent only 2.4 percent of total assets. In short, we
have a manageable situation that is better than that of many of our bank peers.
Still, problems in the loan portfolio have had a deleterious impact on
earnings. Beyond the large 2007 provision for loan losses, which was more than
six times greater than the provision in 2006, we recognized expenses such as
property taxes on real estate owned and continued to write down the value of
real estate that we acquired in the course of our collection process to reflect
deteriorating market prices.
4
Those non-performing assets, which by definition do not accrue interest,
coupled with an unfavorable interest rate environment, put noticeable downward
pressure on our net interest margins. A low prevailing prime rate and a
relatively flat yield curve kept the yields on our loans and investments well
below optimum levels. At the same time, competitive pressures in our local
markets prevented us from making commensurate reductions in the rates we paid on
deposits. Consequently, our net interest margin for all of 2007 was only 3.48%
while it had been 3.80% one year earlier. In comparison, the net interest margin
for all U.S. banks was 3.30% in the Fourth Quarter according to the FDIC
Quarterly Report. In that report, the FDIC summarized the situation by saying,
"This is the lowest quarterly net interest margin since 1989." Therefore, it
would be fair to say that we are doing better than the banking industry as a
whole but not as well as we would like.
As we evaluate our situation, we recognize that there are some factors
influencing our business that we can control but there are many external factors
that we cannot control. Sometimes, we cannot even foresee them.
Perhaps most important among those we can control, almost 98 percent of
the loans we have made were good business that is being repaid as agreed. Our
lenders are experienced professionals who consistently do a good job. Even the
loans they made that proved troublesome were well underwritten and adequately
collateralized when they were originated. We have avoided excessive
concentration of our business in a single industry or market segment. Developing
a branch network, that stretches from Washtenaw County to Macomb County, has
allowed us to diversify geographically both our deposit gathering and lending
activities. Even as we expanded, we have kept our overhead expenses under strict
control. We have resisted the temptation to invest in exotic debt securities
that offered high yields but had high risks embedded in them. Finally, we have
an outstanding staff of people who know their jobs and perform their duties
admirably. To be successful, a billion-dollar bank needs a strong team at every
level and we are confident that we have one.
The largest single leap forward in building a billion-dollar organization
was the acquisition, in January, of Fidelity Financial Corporation of Michigan.
This transaction, which we discussed in detail in last year's annual report,
added more than $200 million to our total assets and gave us seven new branch
offices in affluent Oakland County. While the acquisition resulted in over $1
million in one time severance, conversion and re-branding expenses, the
customers that we acquired have allowed us to achieve operational economies of
scale going forward. The Fidelity offices were fully converted to our computer
systems and integrated within our management structure by mid-year. There were
no unanticipated complications.
We also want to note that Community Bank of Dearborn was renamed Fidelity
Bank on April 1, 2007. This name change was made possible by the Fidelity
Financial acquisition. As we grew, we came to realize that many prospective
customers misjudged our considerable capabilities as a billion dollar
institution because of our name. There are numerous banks and credit unions in
Michigan that have "Community" in their names but they are all considerably
smaller than our subsidiary bank. In addition, "of Dearborn" was seen by some as
a geographical limitation. We are pleased to report that this name change has
been well received by our customers and the markets we serve.
Moving ahead, our highest priority is to contain the problems in the loan
portfolio and seek to work them out as conditions allow. However, there is no
"quick fix" for many of these problems and we do not intend to allow them to
become our sole concern. At this writing, there is no assurance that housing
prices have bottomed out and there is still an enormous oversupply of new and
existing homes for sale in our market area. It is also entirely possible that we
could encounter additional problems with some of the current loans on our books.
Nevertheless, as experienced bankers we are not navigating completely unfamiliar
waters. We know that every depressed market reaches a bottom and then begins to
recover. We are prepared, if necessary, to recognize modest losses in order to
make large recoveries. In addition, we are monitoring developments among our
customers and in the marketplace very carefully.
5
Our problems are not so great that they will stymie our progress on many
other fronts. We will continue marketing deposits and loans throughout our
four-county market. Future growth rates might be more moderate than they have
been in the recent past but we do anticipate continued growth all the same. We
have said in the past that there are substantial pockets of prosperity in
southeastern Michigan where we can seek profitable new business. That is still
true in spite of the obvious problems that tend to make headlines in the media.
We expect to advance the interests of our stockholders in 2008 and the
years ahead, just as we have since Fidelity Bank opened for business in 1994. We
understand the banking business and the markets we serve. Our financial
condition is strong. Our operations are profitable. Our directors, officers and
staff are very good people who know their jobs and how best to serve our
customers. Our branch network provides opportunities for profitable growth
throughout Southeast Michigan. Even though we did encounter problems caused by
factors beyond our control this past year, we remain well positioned to return
to a level of profitability that is consistent with our past history.
The Annual Meeting of Stockholders will be held on May 20, 2008, at the
Park Place, 23400 Park Avenue, Dearborn, Michigan, at 4:00 p.m. Our directors
and senior officers look forward to meeting you, thanking you for your support
and cooperation, providing you with a detailed report on our operations,
answering your questions, and hearing your suggestions.
Sincerely,
/s/ John E. Demmer
- -------------------------------------
John E. Demmer
Chairman of the Board
/s/ Michael J. Ross
- -------------------------------------
Michael J. Ross
President and
Chief Executive Officer
6
SUMMARY OF SELECTED FINANCIAL DATA
The following selected consolidated financial and other data as of and for each
of the five years in the period ended December 31, 2007 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, 2007 and 2006,
and the Consolidated Statements of Income for the years ended December 31, 2007,
2006 and 2005 are included elsewhere in this Annual Report.
(In thousands, except share and per share data) 2007 2006 2005 2004 2003
----------- ----------- ----------- ----------- -----------
OPERATIONS
Interest income $ 70,110 $ 53,886 $ 43,855 $ 29,790 $ 23,564
Interest expense 36,491 25,884 16,403 9,409 8,631
----------- ----------- ----------- ----------- -----------
Net interest income 33,619 28,002 27,452 20,381 14,933
Provision for loan losses 5,821 943 1,081 1,400 1,699
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan losses 27,798 27,059 26,371 18,981 13,234
Total non-interest income 1,020 925 505 1,065 1,917
Total non-interest expense 23,796 16,225 15,499 11,700 9,823
----------- ----------- ----------- ----------- -----------
Net income before federal income tax expense 5,022 11,759 11,377 8,346 5,328
Income tax expense 1,856 3,940 3,867 2,837 1,807
----------- ----------- ----------- ----------- -----------
Net income $ 3,166 $ 7,819 $ 7,510 $ 5,509 $ 3,521
=========== =========== =========== =========== ===========
FINANCIAL CONDITION
Total assets $ 1,046,981 $ 855,931 $ 706,497 $ 652,662 $ 446,075
Mortgage loans held for sale 1,316 1,823 1,041 1,692 1,505
Investment securities, available for sale 8,902 5,878 17,153 21,075 16,948
Federal Home Loan Bank stock 2,072 1,288 1,293 1,122 1,073
Loans 952,084 756,420 657,037 587,562 400,958
Allowance for loan losses (10,617) (7,775) (6,808) (5,884) (4,314)
Other assets 93,224 98,297 36,781 26,226 8,757
Deposits 822,627 633,216 582,438 540,880 379,619
Federal Home Loan Bank advances 41,370 25,561 25,588 20,614 20,638
Subordinated debentures 10,000 10,000 10,000 10,000 10,000
Other borrowings 30,580 37,919 1,615 4,115 --
Other liabilities 4,856 4,250 2,643 2,449 1,217
Stockholders' equity 137,548 144,985 84,213 74,604 34,601
PER SHARE INFORMATION (1)
Net income per common share - basic $ 0.37 $ 1.23 $ 1.27 $ 1.16 $ 0.90
Net income per common share - diluted $ 0.36 $ 1.17 $ 1.20 $ 1.06 $ 0.83
Book value per common share $ 16.70 $ 16.15 $ 14.11 $ 12.80 $ 8.77
Average shares outstanding - basic 8,602,704 6,372,471 5,899,281 4,767,907 3,908,219
Average shares outstanding - diluted 8,827,531 6,672,319 6,274,404 5,217,001 4,246,523
Shares outstanding at end of period 8,237,413 8,975,085 5,967,190 5,827,368 3,943,151
OTHER DATA
Return on average assets 0.30% 1.02% 1.08% 1.05% 0.89%
Return on average equity 2.21% 8.20% 9.44% 10.56% 10.80%
Net interest margin 3.48% 3.80% 4.14% 4.04% 3.97%
Net interest spread 2.74% 3.06% 3.62% 3.69% 3.63%
Allowance for loan losses to total loans 1.12% 1.03% 1.04% 1.00% 1.08%
Nonperforming assets to total assets 2.42% 0.90% 0.26% 0.47% 0.42%
Stockholders' equity to total assets 13.14% 16.94% 11.92% 11.43% 7.76%
Total interest expense to gross interest income 52.05% 48.03% 37.40% 31.58% 36.63%
Number of Offices 19 12 12 12 8
- ------------
(1) All share and per share amounts have been adjusted to reflect the issuance
of stock dividends.
7
COMMITMENT TO COMMUNITY
Commitment to community is one of the primary principles upon which
Dearborn Bancorp, Inc. and its primary subsidiary, Fidelity Bank was founded.
Since Fidelity Bank 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 2007,
the Bank provided the following local organizations with financial support or
personal involvement:
Agape Christian Academy, Canton Dearborn Rotary Club
American Arab Chamber of Commerce Dearborn Senior Center
American Red Cross Dearborn Symphony Orchestra
Ann Arbor Board of Realtors Divine Child School
Ann Arbor Chamber of Commerce Festival of Trees
Ann Arbor Symphony Orchestra Garden City Hospital Foundation
Auburn Hills Chamber of Commerce Garden Club of Dearborn
Bikers for Kids Foundation Goodwill Industries of Greater Detroit
Birmingham Lions Club Habitat for Humanity
Birmingham Optimist Club Henry Ford Community College Foundation
Canton Chamber of Commerce Junior League Goodwill
Canton Community Foundation Mike Adray Memorial Foundation
Canton Exchange Club Mount Clemens Lions Club
Canton Lion's Club Northville Chamber of Commerce
Canton Senior Center Oakwood Health Care Foundation
Canton Senior Safety Coalition Plymouth Chamber of Commerce
Central Macomb Chamber of Commerce RARE Foundation
Children's Charitites Coalition Saline Area Chamber of Commerce
Clinton Township Community Blood Drive Showcase Plymouth
Clinton Township Senior Expo Southern Wayne County Chamber of Commerce
Dearborn Animal Shelter Southfield Area Chamber of Commerce
Dearborn Baseball Southgate Senior Center
Dearborn Board of Realtors St Joseph Hospital
Dearborn Chamber of Commerce St Joseph Mercy Saline Hospital
Dearborn Community Arts Council Starfish Family Services
Dearborn Elderfest The Birmingham Bloomfield Chamber of Commerce
Dearborn Exchange Club The Community House
Dearborn Goodfellows Trenton Rotary Club
Dearborn Heights Chamber of Commerce Washtenaw County 4-H Fair
Dearborn Heights Lion's Club Washtenaw Housing Alliance
Dearborn Heights Parks and Recreation Wayne County 4-H Fair
Dearborn Heights Spirit Festival Wayne County Treasurers Association
Dearborn Homecoming West Washtenaw Business Association
Dearborn Kiwanis Western Wayne Association of Realtors
Dearborn Optimist Club Westland Community Foundation
Dearborn Police Officers Charity YWCA of Western Wayne County
8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Dearborn Bancorp, Inc. and Subsidiary
Dearborn, Michigan
We have audited the accompanying consolidated balance sheets of Dearborn
Bancorp, Inc. and subsidiary as of December 31, 2007 and 2006, 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, 2007. 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, 2007 and 2006, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2007, 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,
2007, 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 15, 2008 expressed an unqualified opinion
thereon.
Crowe Chizek and Company LLC
Grand Rapids, Michigan
March 15, 2008
9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Dearborn Bancorp, Inc. and Subsidiary
Dearborn, Michigan
We have audited Dearborn Bancorp Inc.'s internal control over financial
reporting as of December 31, 2007, 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, included in the accompanying Management's
Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on 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, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk, 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, Dearborn Bancorp, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have 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 15, 2008
expressed an unqualified opinion on those consolidated financial statements.
Crowe Chizek and Company LLC
Grand Rapids, Michigan
March 15, 2008
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, 2007. 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, 2007, Dearborn Bancorp, Inc. maintained effective control over
financial reporting presented in conformity with generally accepted accounting
principles based on those criteria.
The Corporation's registered public accounting firm has issued an attestation
report on our 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
(Dollars, in thousands) December 31,
--------------------------
2007 2006
----------- -----------
ASSETS
Cash and cash equivalents
Cash and due from banks $ 7,869 $ 5,824
Federal funds sold 1,495 64,198
Interest bearing deposits with banks 118 8
----------- -----------
Total cash and cash equivalents 9,482 70,030
Mortgage loans held for sale 1,316 1,823
Securities available for sale 8,902 5,878
Federal Home Loan Bank stock 2,072 1,288
Loans
Loans 952,084 756,420
Allowance for loan losses (10,617) (7,775)
----------- -----------
Net loans 941,467 748,645
Premises and equipment, net 22,782 14,293
Real estate owned 6,319 52
Goodwill 34,028 5,473
Other intangible assets 11,133 2,041
Accrued interest receivable 3,816 3,337
Other assets 5,664 3,071
----------- -----------
Total assets $ 1,046,981 $ 855,931
=========== ===========
LIABILITIES
Deposits
Non-interest bearing deposits $ 83,594 $ 53,065
Interest bearing deposits 739,033 580,151
----------- -----------
Total deposits 822,627 633,216
Other liabilities
Federal funds purchased 30,100 37,300
Securities sold under agreements to repurchase 480 619
Federal Home Loan Bank advances 41,370 25,561
Accrued interest payable 3,168 3,734
Other liabilities 1,688 516
Subordinated debentures 10,000 10,000
----------- -----------
Total liabilities 909,433 710,946
STOCKHOLDERS' EQUITY
Common stock - no par value 20,000,000 shares
authorized, 8,237,413 and 8,975,085 shares
outstanding in 2007 and 2006, respectively 134,278 144,907
Retained earnings 3,250 84
Accumulated other comprehensive (loss) 20 (6)
----------- -----------
Total stockholders' equity 137,548 144,985
----------- -----------
Total liabilities and stockholders' equity $ 1,046,981 $ 855,931
=========== ===========
The accompanying notes are an integral part of these consolidated statements
12
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data) Years Ended December 31,
-----------------------------------------
2007 2006 2005
----------- ----------- -----------
Interest income
Interest on loans $ 68,947 $ 52,321 $ 42,904
Interest on securities available for sale 603 834 598
Interest on deposits with banks 127 158 111
Interest on federal funds 433 573 242
----------- ----------- -----------
Total interest income 70,110 53,886 43,855
Interest expense
Interest on deposits 33,303 23,447 14,427
Interest on other borrowings 3,188 2,437 1,976
----------- ----------- -----------
Total interest expense 36,491 25,884 16,403
----------- ----------- -----------
Net interest income 33,619 28,002 27,452
Provision for loan losses 5,821 943 1,081
----------- ----------- -----------
Net interest income after provision for loan losses 27,798 27,059 26,371
----------- ----------- -----------
Non-interest income
Service charges on deposit accounts 1,267 699 639
Fees for other services to customers 141 48 79
Gain on the sale of loans 163 145 361
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 (26) (103) 92
Write-down of real estate owned (701) -- --
Other income 176 127 74
----------- ----------- -----------
Total non-interest income 1,020 925 505
Non-interest expense
Salaries and employee benefits 13,109 10,288 9,402
Occupancy and equipment expense 3,663 2,420 2,528
Amortization of intangible assets 1,328 250 230
Advertising and marketing 468 385 384
Stationery and supplies 617 402 365
Professional services 1,042 768 893
Data processing 716 531 448
Defaulted loan expense 685 78 143
Other operating expense 2,168 1,103 1,106
----------- ----------- -----------
Total non-interest expense 23,796 16,225 15,499
----------- ----------- -----------
Income before federal income tax expense 5,022 11,759 11,377
Income tax expense 1,856 3,940 3,867
----------- ----------- -----------
Net income $ 3,166 $ 7,819 $ 7,510
=========== =========== ===========
Per share data:
Net income - basic $ 0.37 $ 1.23 $ 1.27
Net income - diluted $ 0.36 $ 1.17 $ 1.20
Weighted average number of shares outstanding - basic 8,602,704 6,372,471 5,899,281
Weighted average number of shares outstanding - diluted 8,827,531 6,672,319 6,274,404
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, 2007, 2006 and 2005
Accumulated
Other Total
Common Retained Comprehensive Stockholders'
(In thousands, except shares) Stock Earnings Income (Loss) Equity
--------- -------- ------------- -------------
Balance, January 1, 2005 $ 74,918 $ 344 $ (658) $ 74,604
Stock awards earned (11,095 shares) 21 -- -- 21
Stock option expense 10 -- -- 10
Exercise of stock options (118,747 shares) 1,028 -- -- 1,028
Tax benefit from exercise of issuance of stock options 426 -- -- 426
Stock dividend #1 (241,690 shares) 3,307 (3,307) -- --
Stock dividend #2 (258,012 shares) 3,974 (3,974) -- --
Net income -- 7,510 -- 7,510
Other comprehensive income
Change in net unrealized loss on
securities available for sale -- -- 190 190
Reclassification adjustment for losses
included in net income -- -- 740 740
---------- ----------
Net change in net unrealized loss
on securities available for sale -- -- 930 930
Deferred 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 (CONTINUED)
Years Ended December 31, 2007, 2006 and 2005
Accumulated
Other Total
Common Retained Comprehensive Stockholders'
(In thousands, except shares) Stock Earnings Income (Loss) Equity
------------ --------- -------------- -------------
Balance, December 31, 2005 $ 83,684 $ 573 $ (44) $ 84,213
Issuance of common stock (2,918,250 shares) 55,131 -- -- 55,131
Purchase of common stock (122,700 shares) (2,824) -- -- (2,824)
Stock awards earned (11,164 shares) 151 -- -- 151
Stock option expense 67 -- -- 67
Exercise of stock options (44,833 shares) 292 -- -- 292
Tax benefit from exercise of stock options 98 -- -- 98
Stock dividend #1 (272,754 shares) 4,115 (4,115) -- --
Stock dividend #2 (427,228 shares) 4,193 (4,193) -- --
Net income -- 7,819 -- 7,819
Other comprehensive income
Changes in net unrealized loss on
securities available for sale 68 68
Reclassification adjustment for gain
included in net income -- -- (9) (9)
------------- ------------
Net change in net unrealized loss
on securities available for sale -- -- 59 59
Deferred 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 CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
Years Ended December 31, 2007, 2006 and 2005
Accumulated
Other Total
Common Retained Comprehensive Stockholders'
Stock Earnings Income Equity
----------- --------- ------------- -------------
Balance, December 31, 2006 $ 144,907 $ 84 $ (6) $ 144,985
Purchase of common stock (751,800 shares) (10,801) -- -- (10,801)
Stock awards earned (613 shares forfeited) (70) -- -- (70)
Stock option expense (30) -- -- (30)
Exercise of stock options (14,741 shares) 62 -- -- 62
Tax benefit from exercise of stock options 210 -- -- 210
Net income -- 3,166 -- 3,166
Other comprehensive income
Changes in net unrealized loss on
securities available for sale 38 38
Reclassification adjustment for gain
included in net income -- -- 0 0
------------- ------------
Net change in net unrealized loss
on securities available for sale -- -- 38 38
Deferred tax effects (12) (12)
------------- ------------
Other comprehensive income -- -- 26 26
Total comprehensive income 3,192
----------- -------- ------------- ------------
Balance, December 31, 2007 $ 134,278 $ 3,250 $ 20 $ 137,548
=========== ======== ============= ============
The accompanying notes are an integral part of these consolidated statements
16
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Years Ended December 31,
------------------------------------------
2007 2006 2005
----------- ---------- -----------
Cash flows from operating activities
Interest and fees received $ 69,631 $ 53,135 $ 42,710
Interest paid (37,057) (23,833) (15,827)
Proceeds from sale of mortgages held for sale 20,841 22,339 37,556
Origination of mortgages held for sale (20,171) (22,789) (36,446)
Taxes paid (3,529) (4,590) (3,400)
Gain (loss) on sale of real estate owned (26) (103) 92
Cash paid to suppliers and employees (20,232) (14,146) (14,255)
----------- ---------- -----------
Net cash provided by operating activities 9,457 10,013 10,430
Cash flows from investing activities
Sale of securities available for sale 18,007 96,704 3,260
Proceeds from calls, maturities and repayments of
of securities available for sale 12,432 12,848 12,357
Purchases of securities available for sale (12,219) (97,941) (11,496)
(Purchase) sale of Federal Home Loan Bank stock (145) 5 (171)
Increase in loans, net of payments received (27,004) (99,359) (69,632)
Purchases of property and equipment (999) (1,447) (1,648)
Net cash paid in Fidelity acquisition (58,027) -- --
----------- ---------- -----------
Net cash used in investing activities (67,955) (89,190) (67,330)
Cash flows from financing activities
Net decrease in non-interest bearing deposits (15,477) (6,587) (3,413)
Net increase in interest bearing deposits 17,253 57,365 44,971
Decrease in repurchase agreements (139) (996) (2,500)
Net increase (decrease) in federal funds purchased (7,200) 37,300 --
Federal Home Loan Bank advances 20,000 -- 5,000
Repayments on Federal Home Loan Bank advances (5,958) (27) (26)
Issuance of common stock -- 55,131 --
Purchase of common stock (10,801) (2,824) --
Exercise of stock options 62 292 1,028
Tax benefit from the exercise of stock options 210 98 426
----------- ---------- -----------
Net cash provided by financing activities (2,050) 139,752 45,486
Increase (decrease) in cash and cash equivalents (60,548) 60,575 (11,414)
Cash and cash equivalents at the beginning of year 70,030 9,455 20,869
----------- ---------- -----------
Cash and cash equivalents at the end of year $ 9,482 $ 70,030 $ 9,455
=========== ========== ===========
The accompanying notes are an integral part of these consolidated statements.
17
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands) Years Ended December 31,
------------------------------------------
2007 2006 2005
----------- ---------- -----------
Reconciliation of net income to net cash provided by
operating activities
Net income $ 3,166 $ 7,819 $ 7,510
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 5,821 943 1,081
Depreciation and amortization expense 1,440 946 980
Restricted stock award expense (70) 151 21
Stock option expense (30) 67 10
Accretion of discount on investment securities (272) (277) (47)
Amortization of premium on investment securities -- 8 38
Amortization of intangible assets 1,328 250 230
(Increase) decrease in mortgages held for sale 507 (782) 651
(Increase) decrease in interest receivable 765 (751) (697)
Increase (decrease) in interest payable (903) 2,051 576
(Gain) loss on sale or writedown of securities
available for sale -- (9) 740
(Increase) decrease in real estate owned 726 -- --
(Increase) decrease in other assets (2,236) 41 (281)
Increase (decrease) in other liabilities (785) (444) (382)
----------- ---------- -----------
Net cash provided by operating activities $ 9,457 $ 10,013 $ 10,430
=========== ========== ===========
Supplemental noncash disclosures:
Transfers from loans to real estate owned $ 6,436 $ 91 $ 1,850
Noncash investing activities:
Fidelity Bank acquisition:
Loans acquired 178,052
Securities available for sale acquired 20,934
Federal Home Loan Bank stock acquired 639
Bank premises and equipment 8,930
Acquisition intangibles recorded 38,975
Other assets acquired 2,194
Deposits assumed (187,635)
Federal Home Loan Bank advances assumed (1,767)
Other liabilities assumed (2,295)
-----------
$ 58,027
===========
The accompanying notes are an integral part of these consolidated statements.
18
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the
preparation of the accompanying consolidated financial statements
follows.
Nature of Operations and Principals of Consolidation
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.
As discussed in Note B, the Corporation acquired Fidelity Financial
Corporation of Michigan on January 4, 2007 and merged its operations
into the Bank. On April 30, 2007, the Community Bank of Dearborn was
renamed Fidelity Bank. The Bank operates nineteen banking offices in
Dearborn (2), Dearborn Heights, Plymouth Township, Canton Township,
Clinton Township (2), Southgate, Auburn Hills, Saline, Ann Arbor (2),
Birmingham, Bloomfield Township, Bingham Farms, Southfield (3) and
Shelby Township in Michigan, offering a full range of banking services
to individuals and businesses. The Bank also operates 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 consumer 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.
The consolidated financial statements include the accounts of Dearborn
Bancorp, Inc. and its wholly-owned subsidiary, Fidelity Bank and its
wholly-owned subsidiaries, Community Bank Mortgage, Inc., Community
Bank Insurance Agency, Inc. and Community Bank Audit Services, Inc. All
significant intercompany transactions are eliminated in consolidation.
Use of Estimates
In the preparation of financial statements, management is required to
make estimates and assumptions that affect reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Estimates that are more susceptible to change in the near
term include the allowance for loan losses, fair value of real estate
owned, fair value of certain financial instruments, and the carrying
value of intangible assets.
19
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
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, federal funds sold, and 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,
net of deferred income tax, in other comprehensive income and as a
separate component of stockholders' equity. 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 sold 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 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.
20
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
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 current 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 $150,000 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 less costs to sell when acquired, establishing a
new cost basis. If fair value declines below the new cost basis, a
valuation allowance is recorded through expense. Operating 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 - 10 to 39 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.
21
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
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 bank acquisitions in 2004
and 2007. 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.
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.
Employee compensation expense under the 2005 Long Term Incentive Plan
is reported using the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-based Compensation". Since stock-based
compensation cost is reflected in net income in 2005, there is no pro
forma effect.
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.
22
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Corporation files a consolidated federal income tax return. Income
tax expense is the total of federal income tax due or refundable and
the change in deferred tax assets and liabilities. 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.
The Corporation adopted FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"), as of January 1, 2007. A tax
position is recognized as a benefit only if it is "more likely than
not" that the tax position would be sustained in a tax examination,
with a tax examination being presumed to occur. The amount recognized
is the largest amount of tax benefit that is greater than 50% likely of
being realized on examination. For tax positions not meeting the "more
likely than not" test, no tax benefit is recorded. The adoption had no
affect on the Corporation's financial statements.
The Corporation recognizes interest and/or penalties related to income
tax matters in income tax expense.
Stock Dividends
The fair value of shares issued in stock dividends is transferred from
retained earnings to common stock. 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.
Earnings Per Share
Basic earnings per share is net income (loss) divided by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share includes the dilutive effect of additional potential
common shares issuable under stock options. Earnings 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 deferred income tax, which are
also recognized as separate components of equity.
23
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Restrictions on Cash
The Corporation was required to have $25,000 of cash on hand or on
deposit with the Federal Reserve Bank to meet regulatory reserve and
clearing requirements at year end 2007 and 2006. These balances do not
earn interest.
Dividend Restrictions
Banking regulations require maintaining certain capital levels and may
limit the dividends paid by the Bank to the Corporation or by the
Corporation to stockholders.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant
market information and other assumptions, as more fully disclosed in a
separate note. Fair value estimates involve uncertainties and matters
of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad
markets for particular items. Changes in assumptions or in market
conditions could significantly affect the estimates.
Adoption of New Accounting Standards:
In February 2006, FASB issued Statement No. 155, "Accounting for
Certain Hybrid Financial Instruments" (SFAS No. 155), which permits
fair value measurement for hybrid financial instruments that contain an
embedded derivative that otherwise would require bifurcation.
Additionally, SFAS No. 155 clarifies the accounting guidance for
beneficial interests in securitizations. Under SFAS No. 155, all
beneficial interests in a securitization will require an assessment in
accordance with SFAS No. 133 to determine if an embedded derivative
exists within an instrument. In January 2007, the FASB issued
Derivatives Implementation Group Issue B40, "Application of Paragraph
13(b) to Securitized Interests in Prepayable Financial Assets" (DIG
Issue B40). DIG Issue B40 provides an exemption from the embedded
derivative test of paragraph 13(b) of SFAS No. 133 for instruments that
would otherwise require bifurcation if the test is met solely because
of a prepayment feature included within the securitized interest and
prepayment is not controlled by the security holder. SFAS No. 155 and
DIG Issue B40 are effective for fiscal years beginning after September
16, 2006. The adoption of SFAS No. 155 and DIG Issue B40 had no effect
on the Corporation's financial statements for the year ended December
31, 2007.
24
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Effect of Newly Issued But Not Yet Effective Accounting Standards:
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements". This statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair
value measurements. This Statement establishes a fair value hierarchy
about the assumptions used to measure fair value and clarifies
assumptions about risk and the effect of a restriction on the sale or
use of an asset. The standard is effective for fiscal years beginning
after November 15, 2007. In February 2008, the FASB issued Staff
Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This
FSP delays the effective date of FAS 157 for all nonfinancial assets
and nonfinancial liabilities, except those that are recognized or
disclosed at fair value on a recurring basis (at least annually) to
fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years. The impact of the adoption was not material.
In February 2007, the FASB issued Statement No. 159, "The Fair Value
Option for Financial Assets and Liabilities". The standard provides
companies with an option to report selected financial assets and
liabilities at fair value and establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that
choose different measurement attributes for similar types of assets and
liabilities. The new standard is effective for the Corporation on
January 1, 2008. The Corporation did not elect the fair value option
for any financial assets or financial liabilities as of January 1,
2008.
In September 2006, the FASB Emerging Issues Task Force finalized Issue
No. 06-4."Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements". This issue requires that a liability be recorded during
the service period when a split-dollar life insurance agreement
continues after participants' employment or retirement. The required
accrued liability will be based on either the post-employment benefit
cost for the continuing life insurance or based on the future death
benefit depending on the contractual terms of the underlying agreement.
The issue is effective for fiscal years beginning after December 15,
2007. The impact of adoption was not material.
On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109,
"Written Loan Commitments Recorded at Fair Value through Earnings
("SAB 109'). Previously, SAB 105, "Application of Accounting
Principles to Loan Commitments, stated that in measuring the fair
value of a derivative loan commitment, a company should not
incorporate the expected net future cash flows related to the
associated servicing of the loan. SAB 109 supersedes SAB 105 and
indicates that the expected net future cash flows related to the
associated servicing of the loan should be included in measuring fair
value for all written loan commitments that are accounted for at fair
value through earnings. SAB 105 also indicated that
internally-developed intangible assets should not be recorded as part
of the fair value of a derivative loan commitment, and SAB 109 retains
that view. SAB 109 is effective for derivative loan commitments issued
or modified in fiscal quarters beginning after December 15, 2007. The
Corporation does not expect the impact of this standard to be
material.
25
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE B - ACQUISITION
On January 4, 2007, the Corporation acquired the Fidelity Financial
Corporation of Michigan (Fidelity) for approximately $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 $179,600,000 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. Identified intangible assets and purchase accounting fair
value adjustments are being amortized under various methods over the
expected lives of the corresponding assets and liabilities. Goodwill
will not be amortized, but will be reviewed for impairment on an annual
basis. Goodwill and other intangible assets are tax deductible over 15
years. Identified intangible assets subject to amortization were
$10,421,000. Goodwill recorded was $28,555,000.
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.
26
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE B - ACQUISITION (Continued)
Pro Forma Income Statement for the year ended December 31, 2006 (unaudited)
(In thousands, except share and per share data)
Interest income $ 69,183
Interest expense 30,719
-----------
Net interest income 38,464
Provision for loan loss 1,343
-----------
Net interest income after provision
for loan losses 37,121
Non-interest income 2,139
Non-interest expense 24,930
-----------
Income before income tax provision 14,330
Income tax provision 4,814
-----------
Net income $ 9,516
===========
Per share data:
Net income - basic $ 1.07
Net income - diluted $ 1.04
Weighted average shares outstanding - basic 8,882,966
Weighted average shares outstanding - diluted 9,182,814
27
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE C - 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, 2007
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ----------- ---------
US Treasury securities $ 6,800 15 $ (10) $ 6,805
US Government sponsored entity securities 1,009 4 -- 1,013
Municipal securities 758 16 -- 774
Mortgage backed securities 305 5 -- 310
----------- ------------ ----------- ---------
Totals $ 8,872 $ 40 $ (10) $ 8,902
=========== ============ =========== =========
December 31, 2006
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ----------- ---------
US Treasury securities $ 4,982 $ -- $ (14) $ 4,968
Municipal securities 497 4 -- 501
Mortgage backed securities 407 2 -- 409
----------- ------------- ----------- ---------
Totals $ 5,886 $ 6 $ (14) $ 5,878
=========== ============= =========== =========
The amortized cost and fair value of securities available for sale at
December 31, 2007 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 less than one year $ 7,809 $ 7,818
Due in one year through five years 758 774
Mortgage backed securities 305 310
-------------- ------------
Totals $ 8,872 $ 8,902
============== ============
28
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE C - SECURITIES AVAILABLE FOR SALE (Continued)
Sales of securities available for sale during 2007 resulted primarily
from the immediate liquidation of securities that were acquired as a
result of the acquisition of Fidelity.
Sales of available for sale securities for the years ended December 31,
are as follows (in thousands):
2007 2006 2005
----------- ----------- -----------
Proceeds $ 18,007 $ 96,704 $ 3,260
Gross gains -- 9 --
Gross losses -- -- 44
Securities having a carrying value of $8,478,000 and $1,392,000 at
December 31, 2007 and 2006, respectively, were pledged to secure
Federal Home Loan Bank of Indianapolis advances, time deposits and
securities sold under agreements to repurchase.
Securities with unrealized losses at year-end 2007 and 2006, aggregated
by investment category and length of time that individual securities
have been in a continuous unrealized loss position, are as follows:
December 31, 2007
Less than one year One year or more Total
------------------------ ----------------------- ----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
--------- ---------- -------- ----------- -------- ----------
US Treasury securities $ 2,330 $ (10) $ -- $ -- $ 2,330 $ (10)
--------- ---------- -------- ----------- -------- ----------
Totals $ 2,330 $ (10) $ -- $ -- $ 2,330 $ (10)
========= ========== ======== =========== ======== ==========
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)
========= ========== ======== ========== ======== ==========
29
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE C - SECURITIES AVAILABLE FOR SALE (Continued)
Unrealized losses on securities available for sale at December 31, 2007
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 securities approach their maturity date.
NOTE D - LOANS
Major categories of loans included in the portfolio at December 31 are
as follows (in thousands):
Percent
2007 2006 Incr(decr)
----------- ------------- ----------
Consumer loans $ 35,833 $ 32,282 11.00%
Commercial, financial, & other 174,958 124,523 40.50%
Construction and land development loans 147,750 149,743 (1.33)%
Commercial real estate mortgages 539,306 401,924 34.18%
Residential real estate mortgages 54,237 47,948 13.12%
----------- ------------- ----------
Total loans 952,084 756,420 25.87%
Allowance for loan losses (10,617) (7,775)
----------- -------------
Loans, net $ 941,467 $ 748,645
=========== =============
Certain directors and executive officers of the Corporation, including
their related interests, were loan customers of the Bank during 2007
and 2006. These loan transactions for the years ended December 31, are
as follows (in thousands):
2007 2006
------------- -------------
Balance, beginning of year $ 2,497 $ 2,757
New loans during period 181 337
Repayments made during period (184) (597)
------------- -------------
Balance, end of period $ 2,494 $ 2,497
============= =============
30
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE D - LOANS (Continued)
Activity in the allowance for loan losses for the years ended December
31 are as follows (in thousands):
2007 2006 2005
------- ------- ------
Balance, beginning of year $ 7,775 $ 6,808 $5,884
Allowance on loans acquired $ 1,704 -- --
Less charge-offs:
Consumer loans 226 24 112
Commercial, financial & other 914 139 169
Construction and land development loans 2,956 -- --
Commercial real estate mortgages 662 36 86
Residential loans 320 38 --
Plus recoveries:
Consumer loans 25 17 37
Commercial, financial & other 224 218 131
Construction and land development loans 6 -- --
Commercial real estate mortgages 140 26 10
Residential loans -- -- 32
------- ------- ------
Net charge-offs (recoveries) 4,683 (24) 157
Provision for loan losses 5,821 943 1,081
------- ------- ------
Balance at end of year $10,617 $ 7,775 $6,808
======= ======= ======
Allowance to total loans 1.12% 1.03% 1.04%
======= ======= ======
31
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE D - LOANS (Continued)
The aggregate balances in impaired loans at December 31, are as follows
(in thousands):
2007 2006 2005
------- ------ ------
Impaired loans with no allocated allowance for loan losses $27,817 $1,306 $ 341
Impaired loans with allocated allowance for loan losses 10,816 4,254 189
------- ------ ------
Total (net of $3,405 in partial charge offs in 2007) $38,633 $5,560 $ 530
======= ====== ======
Amount of the allowance for loan loss
allocated to impaired loans $ 879 $ 911 $ 69
Average of impaired loans during the year $29,492 $3,788 $ 940
Interest income recognized during impairment $ 1,086 $ -- $ --
Cash-basis interest income recognized $ -- $ -- $ --
Non-performing assets were as follows (in thousands):
2007 2006 2005
------- ------ ------
Loans 90 days or more past due and still accruing $ 884 $2,101 $ 189
Non-accrual loans 18,117 5,560 984
------- ------ ------
Total non performing loans 19,001 7,661 1,173
Real estate owned 6,319 52 661
Other repossessed assets -- 2 2
------- ------ ------
Other non performing assets 6,319 54 663
------- ------ ------
Total nonperforming assets $25,320 $7,715 $1,836
======= ====== ======
Non-performing loans and impaired loans are defined differently.
Non-performing loans include both smaller balance homogeneous loans
that are collectively evaluated for impairment and individually
classified impaired loans.
32
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE E - PREMISES AND EQUIPMENT
Premises and equipment are comprised of the following at December 31
(in thousands):
2007 2006
------- -------
Land and improvements $ 7,853 $ 3,235
Buildings and improvements 15,119 10,226
Furniture and equipment 6,277 5,859
------- -------
29,249 19,320
Less accumulated depreciation 6,467 5,027
------- -------
$22,782 $14,293
======= =======
Depreciation expense for 2007, 2006 and 2005 amounted to $1,440,000,
$946,000 and $980,000, respectively. During 2007, the Corporation
acquired two buildings and certain other furniture and equipment in the
acquisition of Fidelity. The other capital expenditures were primarily
due to purchase and renovation of one branch office and various
improvements in technology.
Rent expense for facilities of $829,000, $622,000 and $617,000 was
incurred during 2007, 2006 and 2005, respectively. Rental commitments
under noncancellable operating leases are as follows, before
considering renewal options that generally are present (in thousands):
2008 $ 757
2009 738
2010 585
2011 402
2012 --
Thereafter --
------
Total $2,482
======
33
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE F - GOODWILL AND OTHER INTANGIBLE ASSETS
As a result of the acquisition of Fidelity Financial Corporation of
Michigan (Fidelity) and the Bank of Washtenaw (Washtenaw) in January of
2007 and October of 2004, respectively, the Corporation acquired
goodwill and other intangible assets. The Corporation identified a core
deposit intangible of $6,863,000 and a borrower relationship intangible
of $3,558,000 related to the acquisition of Fidelity. The Corporation
identified a core deposit intangible of $929,000 and a borrower
relationship intangible of $1,620,000 related to the acquisition of
Washtenaw. These intangible assets were separated from goodwill. The
Corporation recorded amortization expense of $1,328,000, $250,000, and
$230,000 in 2007, 2006 and 2005, respectively. Goodwill amounted to
$34,028,000 and $5,473,000 at December 31, 2007 and 2006, respectively.
There was no impairment of goodwill during 2007 or 2006.
Information concerning other intangible assets at December 31, 2007 and
2006 were as follows (in thousands):
2007
---------------------------------
Gross
Carrying Accumulated
Amount Amortization
-------- ------------
Amortized intangible assets
Core deposit intangible $ 7,792 $ 1,222
Borrower relationship intangible 5,178 615
------- ----------
Total $12,970 $ 1,837
======= ==========
2006
---------------------------------
Gross
Carrying Accumulated
Amount Amortization
-------- ------------
Amortized intangible assets
Core deposit intangible $ 929 $ 302
Borrower relationship intangible 1,620 206
-------- ----------
Total $ 2,549 $ 508
======== ==========
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
------------
2008 $ 1,291
2009 1,261
2010 1,198
2011 1,146
2012 1,060
34
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE G - DEPOSITS
Time deposits of $100,000 or more were $344,026,000 and $330,025,000 at
December 31, 2007 and 2006, respectively. Time deposits of $100,000 or
more from governmental units, which are included in total time deposits
of $100,000 or more were $103,795,000 and $115,363,000 at December 31,
2007 and 2006, respectively.
Scheduled maturities of time deposits at December 31, 2007 are listed
in the following table (in thousands):
$100,000 and over Less than $100,000 Total
----------------- ------------------ ----------
2008 $ 319,012 $ 178,039 $ 497,051
2009 8,625 5,549 14,174
2010 8,028 3,159 11,187
2011 7,595 6,517 14,112
2012 766 588 1,354
----------------- ------------------ ----------
Totals $ 344,026 $ 193,852 $ 537,878
================= ================== ==========
Related party deposits from directors and executive officers of the
Corporation were approximately $6,475,000 and $8,481,000 at December
31, 2007 and 2006, respectively.
NOTE H - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are secured by US
government agency securities with a carrying amount of approximately
$1.0 million and $1.0 million at December 31, 2007 and 2006,
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):
2007 2006
----- ------
Balance at year-end $ 480 $ 619
Average daily balance during the year $ 433 $ 628
Average interest rate during the year 1.25% 1.25%
Maximum month-end balance during year $ 841 $1,442
Weighted average interest rate at year-end 1.25% 1.25%
35
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE I - 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):
2007
---------
Balance at year-end $ 30,100
Average daily balance during the year $ 10,091
Average interest rate during the year 5.41%
Maximum month-end balance during year $ 47,310
Weighted average interest rate at year-end 4.50%
NOTE J - 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
$41,370,000 and $25,561,000 at December 31, 2007 and 2006,
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
$48,101,000, commercial real estate loans in the amount of $80,486,000
and securities available for sale in the amount of $295,000. Federal
Home Loan Bank advances are comprised of the following at December 31,
2007 and 2006 (in thousands):
At December 31, 2007
Maturing in: Amount Rate
- ------------ ---------- ----
2008 $ 20,658 4.79%
2009 20,000 4.76%
2010 302 4.05%
2012 410 5.27%
--------- ----
Total $ 41,370 4.77%
========= ====
At December 31, 2006
Maturing in: Amount Rate
- ------------ ---------- ----
2007 $ 5,561 4.49%
2008 20,000 4.76%
--------- ----
Total $ 25,561 4.70%
========= ====
The Bank makes monthly interest payments with principal generally due
at maturity. 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 $100 million by a resolution of the Board of Directors of
the Bank. The Bank had the ability to borrow up to $69.7 million based
on collateral pledged by the Bank at December 31, 2007.
36
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE J - FEDERAL HOME LOAN BANK ADVANCES (Continued)
Required payments over the next five years are as follows:
Amount
--------------
2008 $ 20,851
2009 20,164
2010 139
2011 48
2012 168
--------------
Total $ 41,370
==============
NOTE K - SUBORDINATED DEBENTURES
In 2002, Dearborn Bancorp Trust I, a special purpose entity formed by
the Corporation, issued $10,000,000 of floating rate 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 8.59% at December 31, 2007.
The securities have a term of thirty years with interest payments due
on a quarterly basis. The Corporation may redeem the debentures, with
regulatory approval, at face value.
NOTE L - INCOME TAXES
The federal tax provision consists of the following (in thousands):
2007 2006 2005
------- ------- -------
Current $ 1,991 $ 4,260 $ 4,330
Deferred (386) (320) (463)
Change in valuation allowance 251 -- --
------- ------- -------
$ 1,856 $ 3,940 $ 3,867
======= ======= =======
37
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE L - INCOME TAXES (Continued)
Deferred tax assets and liabilities are due to the following at
December 31, (in thousands):
2007 2006
------- -------
Deferred tax assets
Allowance for loan losses $ 3,326 $ 2,595
Deferred loan fees and costs 49 182
Unrealized losses on securities available for sale -- 3
Capital loss carryforward 251 252
Valuation allowance on capital loss carryforward (251) --
Non accrual interest income 241 34
Writedowns on other real estate owned 255 --
Other 41 58
------- -------
Total deferred tax assets 3,912 3,124
Deferred tax liabilities
Premises and equipment (183) (234)
Goodwill and other intangibles (841) (233)
Prepaid expenses (131) (64)
Unrealized losses on securities available for sale (10) --
Other (84) (52)
------- -------
Total deferred tax liabilities (1,249) (583)
------- -------
Net deferred tax asset (liability) $ 2,663 $ 2,541
======= =======
The goodwill and other intangible assets acquired during 2004 and 2007
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. A valuation allowance against this tax deferred asset was
assigned during 2007 for this item based on the likelihood that the
capital loss carryforward will expire prior to its utilization.
There were no unrecognized tax benefits at December 31, 2007, and the
Corporation does not expect the total amount of unrecognized tax
benefits to significantly increase or decrease in the next twelve
months.
The Corporation is no longer subject to examination by the Internal
Revenue Service for years before 2004.
38
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE L - INCOME TAXES (Continued)
Effective tax rates differ from the federal statutory rate of 34%
applied to income before income taxes due to the following:
2007 2006 2005
---- ---- ----
Federal income tax rate 34% 34% 34%
Effect of capital loss carryforward
valuation allowance 5% --% --%
Other, net (2)% --% --%
---- ---- ----
Effective tax rate 37% 34% 34%
==== ==== ====
NOTE M - FINANCIAL INSTRUMENTS AND LOAN COMMITTMENTS
Fair Value of Financial Instruments
The estimated fair value of the Corporation's financial instruments at
December 31 are as follows (in thousands):
2007 2006
------------------------ -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ----------- ----------
Assets:
Cash and cash equivalents $ 9,482 $ 9,482 $ 70,030 $ 70,030
Mortgage loans held for sale 1,316 1,334 1,823 1,837
Securities available for sale 8,902 8,902 5,878 5,878
Federal Home Loan Bank Stock 2,072 2,072 1,288 1,288
Loans, net 952,084 962,383 748,645 752,082
Accrued interest receivable 3,816 3,816 3,337 3,337
Liabilities:
Deposits 822,627 824,649 633,216 634,084
Federal funds purchased 30,100 30,100 37,300 37,300
Securities sold under agreements to repurchase 480 480 619 619
Federal Home Loan Bank advances 41,370 41,736 25,561 25,367
Subordinated debentures 10,000 10,000 10,000 10,000
Accrued interest payable 3,168 3,168 3,734 3,734
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosure for financial instruments:
39
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE M - FINANCIAL INSTRUMENTS AND LOAN COMMITTMENTS (Continued)
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 is not considered material to this presentation.
Loan Committments
Some financial instruments, such as loan commitments, credit lines,
letters of credit and overdraft protection, are issued to meet customer
financing needs. These are agreements to provide credit or to support
the credit of others, as long as conditions established in the contract
are met, and usually have expiration dates. Commitments may expire
without being used. Off-balance sheet risk to credit loss exists up to
the face amount of these instruments, although material losses are not
anticipated. The same policies are used to make such commitments as are
used for loans, including obtaining collareral at exercise of the
commitment.
The Corporation had outstanding loan commitments aggregating
$160,451,000 and $171,095,000 at December 31, 2007 and 2006,
respectively. Loan commitments for variable rate loans were
$110,832,000 and $125,128,000 at December 31, 2007 and 2006,
respectively. Loan commitments for fixed rate loans were $49,619,000
and $45,967,000 at December 31, 2007 and 2006, respectively. The fixed
rate loan commitments at December 31, 2007 have interest rates ranging
from 5.35% to 9.25% and maturities ranging from one year to ten years.
A distribution of outstanding loan commitments by contractual maturity
is shown below (in thousands):
At December 31, 2007
Commitment Period
------------------------------------------------------------------------
Less
than 1 1 - 3 3 - 5 Over 5
year years years years Totals
-------- ------- ------ ------- --------
Home equity lines of credit $ 179 $ 670 $3,921 $12,898 $ 17,668
Residential loan commitments 3,907 -- -- -- 3,907
Standby letters of credit 3,536 1,879 2,000 -- 7,415
Lines of credit - commercial 64,717 3,772 807 1,165 70,461
Commercial construction - residential
land development and construction 19,487 8,009 35 -- 27,531
Other commercial commitments 24,431 3,988 2,837 2,213 33,469
-------- ------- ------ ------- --------
Totals $116,257 $18,318 $9,600 $16,276 $160,451
======== ======= ====== ======= ========
40
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE M - FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET RISK (Continued)
At December 31, 2006
Commitment Period
------------------------------------------------------------------------
Less
than 1 1 - 3 3 - 5 Over 5
year years years 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
Lines of credit - commercial 54,299 1,378 1,413 237 57,327
Commercial construction - residential
land development and construction 9,586 6,247 3 -- 15,836
Other commercial commitments 50,306 16,790 4,187 25 71,308
-------- ------- ------ ------- --------
Totals $121,522 $28,040 $9,066 $12,467 $171,095
======== ======= ====== ======= ========
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 N - EMPLOYEE BENEFIT PLANS
The Bank maintains a 401(k) plan for its employees. All employees are
eligible to participate in the 401(k) plan 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 2007, 2006 and 2005, employer contributions were
$237,000, $171,000 and $148,000, respectively.
NOTE O - REGULATORY CAPITAL REQUIREMENTS
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. The capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
41
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE O - REGULATORY CAPITAL REQUIREMENTS (Continued)
Quantitative measures established by regulation 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).
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, 2007
Total capital
(to risk weighted assets)
Consolidated 112,984 11.57% 78,108 8.00% N/A N/A
Bank 110,486 11.34% 77,972 8.00% 97,465 10.00%
Tier 1 capital
(to risk weighted assets)
Consolidated 102,367 10.48% 39,054 4.00% N/A N/A
Bank 99,869 10.25% 38,986 4.00% 58,479 6.00%
Tier 1 capital
(to average assets)
Consolidated 102,367 10.15% 40,334 4.00% N/A N/A
Bank 99,869 9.99% 39,989 4.00% 49,987 5.00%
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%
At December 31, 2007 and 2006, 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. 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, 2007, the Bank could pay approximately
$10,600,000 in dividends to the parent company without prior regulatory
approval. No cash dividends have ever been paid by the Corporation.
42
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE P - 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
Average
Options Exercise
Outstanding Price
----------- --------
Outstanding at January 1, 2005 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
Exercised (14,741) $4.41
-----------
Outstanding at December 31, 2007 453,682 $8.29
===========
Options outstanding under the 1994 Plan at December 31, 2007 were as
follows:
Outstanding Exerciseable
--------------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Number Life Price Number Price
- ------------------------ -------- ----------- -------- ------- --------
$4.18 - $9.36 335,099 2.9 years $ 6.57 335,099 $ 6.57
$13.07 - $14.65 118,583 5.1 years $ 13.15 118,583 $ 13.15
-------- --------
Totals 453,682 3.5 years $ 8.29 453,682 $ 8.29
======== ========
43
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE P - INCENTIVE STOCK PLANS (Continued)
At December 31, 2007, 2006 and 2005, 453,682, 468,423 and 517,140 options were
exercisable at weighted average exercise prices of $8.29, $8.16 and $8.00 per
share, respectively.
The intrinsic value of options exercised during the years ended December 31,
2007, 2006 and 2005 were approximately $206,000, $707,000 and $1,592,000,
respectively. The intrinsic value of options outstanding at December 31, 2007
was approximately $405,000.
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. The
Corporation's Board of Directors approved grants of performance-based stock
options and restricted stock in 2005 and 2006. 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 over
the vesting period. The actual cost of these awards could range from zero to
100% of the currently recorded compensation cost, depending on the Corporation's
actual performance. The expected compensation cost of the performance-based
awards was being calculated assuming the Corporation's attainment of "target"
performance goals over the vesting period of the awards. In the third quarter of
2007, the performance awards were modified because the original performance
criteria and vesting requirements were no longer considered to be reasonable or
attainable and the Corporation wanted to maintain more practical incentives for
the award recipients. The cost recorded by the Corporation was adjusted during
the third quarter of 2007 based on the modified fair value by reversing the
expense recorded for the original awards and recognizing expense for the
modified awards based on the vesting to date and the modified terms and
performance targets.
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 weighted average fair value of the modified options at the modification date
in 2007 were $4.40 and $3.94 for the options originally granted in 2006 and
2005, respectively. The following assumptions were used to determine the
modified fair value of the options granted in 2006 and 2005 at modification date
in 2007:
Modified in 2007
Originally Granted
---------------------------
2006 2005
--------- ---------
Risk-free interest rate 4.31% 4.23%
Expected option life 5.5 years 4.5 years
Dividend yield 0.00% 0.00%
Expected volatility of stock price 26.26% 26.79%
44
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE P - INCENTIVE STOCK PLANS (Continued)
A summary of the plan's option activity is as follows:
Weighted Average
Modified
Number Exercise
of Shares Price
--------- ----------------
Outstanding at January 1, 2005 --
Shares Granted - Stock Options 17,467 $ 13.06
------
Outstanding at December 31, 2005 17,467 $ 13.06
Shares Granted - Stock Options 17,784 $ 13.06
------
Outstanding at December 31, 2006 35,251 $ 13.06
Shares Granted - Stock Options --
------
Outstanding at December 31, 2007 35,251 $ 13.06
======
Options exercisable --
======
During the year ended December 31, 2007, the Corporation reversed expense
related to stock options of $120,000 and recognized compensation expense of
$46,000 due to the award modifications. The expense that was reversed is
comprised of $76,000 from the grant date through December 31, 2006 and $44,000
during the year ended December 31, 2007. The expense for the modified awards
recognized related to stock options is comprised of $20,000 from the grant date
through December 31, 2006 and $26,000 for the year ended December 31, 2007.
Compensation cost of $20,000 and $7,000 is expected to be recognized during 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 Modification Date
of Shares Value per Share
-------- ------------------
Outstanding at January 1, 2005 --
Restricted Shares Granted 12,843 $ 13.06
------
Outstanding at December 31, 2005 12,843
Restricted Shares Granted 12,239 $ 13.06
Restricted Shares Forfeited (513)
------
Outstanding at December 31, 2006 24,569
Restricted Shares Forfeited (613)
------
Outstanding at December 31, 2007 23,956
======
Restricted shares vested --
======
The Corporation reversed expense related to restricted stock of $270,000 and
recognized expense of $102,000 in the 2007 due to the award modifications. The
expense that was reversed is comprised of $172,000 from the grant date through
December 31, 2006 and $98,000 during 2007. The expense for the modified awards
recognized related to restricted stock is comprised of $45,000 from the grant
date through December 31, 2006 and $57,000 in 2007. Compensation cost of $42,000
and $13,000 is expected to be recognized during 2008 and 2009, respectively.
45
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE Q - EARNINGS PER SHARE
Factors used in the basic and diluted earnings per share calculation
follow (in thousands, except share and per share data):
2007 2006 2005
------------- ------------ -------------
Basic
Net income $ 3,166 $ 7,819 $ 7,510
Weighted average common shares 8,602,704 6,372,471 5,899,281
Basic earnings per common share $ 0.37 $ 1.23 $ 1.27
Diluted
Net income $ 3,166 $ 7,819 $ 7,510
Weighted average common shares 8,602,704 6,372,471 5,899,281
outstanding for basic earnings per
common share
Add: Dilutive effects of assumed
exercise of stock options 224,827 299,848 375,123
------------- ------------ -------------
Average shares and dilutive potential
common shares 8,827,531 6,672,319 6,274,404
============= ============ =============
Dilutive earnings per common share $ 0.36 $ 1.17 $ 1.20
Stock options for 35,251 shares of common stock were not considered in
computing diluted earnings per common share 2006 because they were
antidilutive. There were no antidilutive options in 2007 or 2005. All
share and per share amounts have been adjusted for stock dividends.
46
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE R - 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
(In thousands) December 31,
-------------------------
2007 2006
-------- --------
ASSETS
Cash and cash equivalents $ 715 $ 63,416
Securities, available for sale -- 4,065
Investment in subsidiary 145,050 85,192
Other assets 1,978 2,568
-------- --------
Total assets $147,743 $155,241
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Other liabilities $ 195 $ 256
Subordinated debentures 10,000 10,000
-------- --------
Total liabilities 10,195 10,256
Stockholders' equity 137,548 144,985
-------- --------
Total liabilities and stockholder's equity $147,743 $155,241
======== ========
CONDENSED STATEMENTS OF INCOME
(In thousands) Years Ended December 31,
------------------------------------------
2007 2006 2005
-------- ------- -------
Interest income $ 197 $ 948 $ 447
Dividends from Bank 15,000 -- --
Interest expense 872 870 702
Other operating expenses 1,149 921 725
-------- ------- -------
Net income before income tax and equity
in undistributed income of subsidiary 13,176 (843) (980)
Income tax benefit 665 345 335
-------- ------- -------
Net income before equity in undistributed
income of subsidiary 13,841 (498) (645)
Equity in undistributed income
of subsidiary (dividends in excess of earnings) (10,675) 8,317 8,155
-------- ------- -------
Net income $ 3,166 $ 7,819 $ 7,510
======== ======= =======
47
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE R - PARENT ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands) Years Ended December 31,
--------------------------------------------
2007 2006 2005
-------- -------- --------
Cash flows from operating activities
Net income $ 3,166 $ 7,819 $ 7,510
Adjustments to reconcile net income
to net cash provided by operating activities
(Equity in undistributed income of
subsidiary) dividends in excess of earnings 10,675 (8,317) (8,155)
Other, net 426 81 (52)
-------- -------- --------
Net cash flows provided by operating activities 14,267 (417) (697)
Cash flows from investing activities
Investment in subsidiary (70,516) -- (2,000)
Purchases of securities, available for sale -- (77,920) (11,496)
Proceeds from the sale of securities available for sale -- 77,840 --
Proceeds from calls, maturities and repayments
of securities available for sale 4,077 8,700 9,885
Property and equipment acquired -- -- (20)
-------- -------- --------
Net cash flows used in investing activities (66,439) 8,620 (3,631)
Cash flows from financing activities
Proceeds from exercise of stock options 62 292 1,028
Repurchase of common stock (10,801) (2,824) --
Issuance of common stock -- 55,131 --
Tax benefit of stock options exercised 210 98 426
-------- -------- --------
Net cash flows used in financing activities (10,529) 52,697 1,454
-------- -------- --------
Increase (decrease) in cash and cash equivalents (62,701) 60,900 (2,874)
Cash and cash equivalents at the beginning of year 63,416 2,516 5,390
-------- -------- --------
Cash and cash equivalents at end of year $ 715 $ 63,416 $ 2,516
======== ======== ========
48
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2007, 2006 AND 2005
NOTE S - QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
Interest Net Interest Net Earnings per share
Income Income Income Basic Fully diluted
-------- ------------ ------- -------- -------------
2007
First quarter $17,471 $8,649 $ 1,618 $ 0.18 $ 0.18
Second quarter 17,573 8,595 2,005 0.23 0.22
Third quarter 17,851 8,501 (855) (0.10) (0.10)
Fourth quarter 17,215 7,874 398 0.05 0.05
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
Net income for the third and fourth quarters of 2007 include the impact of
($2,680,000) after tax or ($.31) per share and ($564,000) after tax, or ($.07)
per share, respectively against earnings for additional provisions for loan
losses primarily to address risks associated with loans to residential
developers.
49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
COMPANY OVERVIEW
Dearborn Bancorp, Inc. (the "Corporation") 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 was
renamed Fidelity Bank on April 30, 2007. 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 opened 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 Bank.
The Corporation completed the acquisition of Fidelity Financial Corporation of
Michigan (Fidelity), a commercial bank with seven offices in Oakland County,
Michigan on January 4, 2007. The acquisition significantly expanded the Bank's
presence in Oakland County, Michigan. Management believes that the acquisition
has been beneficial to the Bank's customers and the Corporation's shareholders.
The Bank opened a banking office in Shelby Township, Michigan during the second
quarter of 2007. The Bank currently operates nineteen banking offices in Wayne,
Macomb, Oakland and Washtenaw Counties, Michigan. A list of banking offices is
shown on the following page.
While maintaining satisfactory asset quality and maximizing 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.
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 asset
quality in this environment by enforcing strong underwriting guidelines and
utilizing a diligent loan review process. Despite these measures, the Bank has
recorded charge-offs of certain loans, as the value of the underlying collateral
of certain non-performing loans has continued to decline. Additionally, the
carrying values of real estate owned properties have been adjusted
appropriately, as the market value of the real estate has declined.
50
The Corporation recorded net income of $3,166,000 during 2007, compared to
$7,819,000 during 2006. The decline in earnings during 2007 was primarily due to
the provision for loan losses and the write-down of real estate owned. The
provision for loan losses is determined by the internal analysis of the
allowance for loan losses and the large increase during 2007 was the result of a
higher level of non-performing loans and net charge-offs. Net charge-offs
amounted to $4,683,000 during 2007 compared to net recoveries of $24,000 during
2006. The Corporation also wrote down the value of two real estate properties in
the amount of $701,000 during 2007.
Income during 2007 was also impacted by a compression in the Corporation's net
interest margin compared with 2006. This was the result of competitive pricing
pressure in both loans and deposit generation. Additionally, the continuation of
a flat treasury yield curve has resulted in lower interest rate spreads than in
other reporting periods.
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
51
The date opened, branch location and branch type of each branch is listed below:
Date Opened Location Type of office
- --------------- ------------------------------------ --------------------------------------
February 1994 22290 Michigan Avenue Full service retail branch with ATM
Dearborn, Michigan 48123
December 1995 24935 West Warren Avenue Full service retail branch
Dearborn Heights, Michigan 48127
August 1997 44623 Five Mile Road Full service retail branch with ATM
Plymouth, Michigan 48170
May 2001 1325 North Canton Center Road Full service retail branch with ATM
Canton, Michigan 48187
December 2001 45000 River Ridge Drive Regional lending center
Clinton Township, Michigan 48038
November 2002 19100 Hall Road Full service retail branch with ATM
Clinton Township, Michigan 48038
February 2003 12820 Fort Street Full service retail branch with ATM
Southgate, Michigan 48195
May 2003 3201 University Drive, Suite 180 Full service retail branch
Auburn Hills, Michigan 48326
October 2004 450 East Michigan Avenue Full service retail branch with ATM
Saline, MI 48176
October 2004 250 West Eisenhower Parkway Full service retail branch
Ann Arbor, MI 48103 Regional lending center
October 2004 2180 West Stadium Blvd. Full service retail branch with ATM
Ann Arbor, MI 48103
December 2004 1360 Porter Street Loan production office
Dearborn, MI 48123 Regional lending center
January 2007 1040 East Maple Full service retail branch with ATM
Birmingham, MI 48009 Regional lending center
January 2007 3681 West Maple Full service retail branch with ATM
Bloomfield Township, MI 48301
January 2007 30700 Telegraph Full service retail branch with ATM
Bingham Farms, MI 48025
January 2007 20000 Twelve Mile Road Full service retail branch with ATM
Southfield, MI 48076
January 2007 26555 Evergreen Full service retail branch with ATM
Southfield, Mi 48076
January 2007 200 Galleria Office Center Full service retail branch with ATM
Southfield, MI 48134
January 2007 7755 23 Mile Road Full service retail branch with ATM
Shelby Township, Mi 48316
52
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 losses.
Actual results could differ from those estimates.
The allowance for loan losses 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 losses is an
estimate based primarily on reviews of individual loans, assessments of the
impact of current economic conditions on the portfolio, and historical loss
experience. See Note D of the Notes to Consolidated Financial Statements and the
discussion of "Allowance for Loan Losses" 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.
53
RESULTS OF OPERATIONS
2007 Compared to 2006. The Corporation reported net income of $3,166,000 in 2007
compared to $7,819,000 in 2006, a decrease of $4,653,000 or 60%. The
Corporation's decline in net income was primarily due to an increase in
provision for loan losses and defaulted loan expense and the write-down of real
estate owned. The Corporation's net interest margin also decreased due to
increasing deposit costs and an increase in non-performing loans..
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.
NET INTEREST INCOME
2007 Compared to 2006. Net interest income in 2007 was $33,619,000 compared to
$28,002,000 in 2006, an increase of $5,617,000 or 20%. The increase in net
interest income was primarily due to the acquisition of Fidelity. The
Corporation's net interest rate spread decreased to 2.73% in 2007 from 3.08% in
2006, a decrease of 34 basis points. The Corporation's net interest margin
decreased to 3.48% in 2007 from 3.80% in 2006, a decrease of 32 basis points.
The decrease in the net interest rate spread and net interest margin was due to
increasing liability costs and decreasing assets yields. The decrease in asset
yields was primarily due to the increase in non-performing loans.
Average interest earning assets grew by $227.6 million between the periods while
interest bearing liabilities grew by $194.6 million. While management is
continually reviewing spreads and margins, future increases in the net interest
margin are primarily expected from the diversification of the Bank's deposit
structure. Management expects to decrease time deposits as a percentage of
deposits.
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 3.08% in
2006 from 3.63% in 2005, a decrease of 55 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.
54
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, Year ended December 31,
2007 2006
------------------------------- ----------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
---------- -------- ------- -------- -------- -------
Assets
Interest-bearing deposits with banks $ 2,795 $ 127 4.54% $ 3,333 $ 158 4.74%
Federal funds sold 7,964 433 5.44% 11,682 573 4.90%
Securities available for sale 10,772 603 5.60% 19,555 893 4.57%
Loans 944,225 68,947 7.30% 703,590 52,321 7.44%
---------- -------- ----- -------- -------- -----
Sub-total earning assets 965,756 70,110 7.26% 738,160 53,945 7.31%
Other assets 83,691 28,876
---------- --------
Total assets $1,049,447 $767,036
========== ========
Liabilities and stockholders' equity
Interest bearing deposits $ 749,894 $ 33,303 4.44% $568,095 $ 23,447 4.13%
Other borrowings 56,526 3,188 5.64% 43,694 2,437 5.58%
---------- -------- ----- -------- -------- -----
Sub-total interest bearing liabilities 806,420 36,491 4.53% 611,789 25,884 4.23%
Non-interest bearing deposits 95,036 57,647
Other liabilities 4,736 2,224
Stockholders' equity 143,255 95,376
---------- --------
Total liabilities and stockholders'
equity $1,049,447 $767,036
========== ========
Net interest income $ 33,619 $ 28,061
======== ========
Net interest rate spread 2.74% 3.08%
===== ====
Net interest margin on earning
assets 3.48% 3.80%
===== ====
Tax equivalent edjustment -- (59)
-------- --------
Tax equivalent net interest income $ 33,619 $ 28,002
======== ========
55
(continued)
Year Ended December 31, 2005
--------------------------------
Average Average
(In thousands) Balance Interest Rate
-------- -------- --------
Assets
Interest-bearing deposits with banks $ 3,675 $ 111 3.02%
Federal funds sold 7,783 242 3.11%
Securities available for sale 19,673 598 3.04%
Loans 631,491 42,904 6.79%
-------- -------- ------
Sub-total earning assets 662,622 43,855 6.62%
Other assets 30,220
--------
Total assets $692,842
========
Liabilities and stockholders' equity
Interest bearing deposits $506,228 $ 14,427 2.85%
Other borrowings 41,564 1,976 4.75%
-------- -------- ------
Sub-total interest bearing
liabilities 547,792 16,403 2.99%
Non-interest bearing deposits 63,164
Other liabilities 2,305
Stockholders' equity 79,581
--------
Total liabilities and
stockholders' equity $692,842
========
Net interest income $ 27,452
========
Net interest rate spread 3.63%
======
Net interest margin on earning
assets 4.14%
======
Tax equivalent adjustment --
--------
Tax equivalent net interest income $ 27,452
========
56
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.
2007/2006 2006/2005
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 $ (24) $ (7) $ (31) $ (16) $ 63 $ 47
Federal funds sold (202) 62 (140) 191 140 331
Securities available for sale (492) 202 (290) (5) 300 295
Loans 17,571 (945) 16,626 5,361 4,056 9,417
------- ------- ------- ------- ------ -------
Total earning assets $16,853 $ (688) $16,165 $ 5,531 $4,559 $10,090
======= ======= ======= ======= ====== =======
Liabilities
Interest bearing deposits $ 8,074 $ 1,782 $ 9,856 $ 2,553 $6,467 $ 9,020
Other borrowings 724 27 751 119 342 461
------- ------- ------- ------- ------ -------
Total interest bearing liabilities $ 8,798 $ 1,809 $10,607 $ 2,672 $6,809 $ 9,481
======= ======= ======= ======= ====== =======
Net interest income $ 5,558 $ 609
======= =======
Net interest rate spread (0.34%) (0.55%)
======= =======
Net interest margin on earning
assets (0.32%) (0.34%)
======= =======
PROVISION FOR LOAN LOSSES
2007 Compared to 2006. The provision for loan losses was $5,821,000 in 2007,
compared to $943,000 in 2006, an increase of $4,878,000 or 517%. The increase in
provision during 2007 was due primarily to the increase in non-accrual loans and
net charge-offs during the period as a result of the collapse of the residential
real estate market in Southeastern Michigan. Non-accrual loans increased to
$18,117,000 at December 31, 2007 from $5,560,000 at December 31, 2006. During
2007, the Bank recorded net charge-offs of $4,683,000 compared to net recoveries
of $24,000 during 2006. These economic conditions have impacted our portfolio of
land development and commercial construction loans and is the primary cause of
the increase in non-performing loans. At the time of origination, these loans
were well-collateralized loans with well-established real estate developers and
home builders. However, the underlying value of our collateral related to these
types of loans has declined as the demand for new residential construction in
Southeastern Michigan has diminished dramatically.
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.
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.
57
NON-INTEREST INCOME
2007 Compared to 2006. Non-interest income was $1,020,000 in 2007, compared to
$925,000 in 2006, an increase of $95,000 or 10%. The increase was primarily due
to the increase in service charges and fees to customers as a result of the
acquisition of Fidelity. Service charges and other fees to customers were
$1,408,000 in 2007 compared to $747,000 in 2006, an increase of $661,000 or 88%.
This increase was substantially offset by the write-down of real estate owned.
During 2007, the Bank wrote down the value of an industrial building and a
development with 11 residential building lots by $701,000.
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.
NON-INTEREST EXPENSE
2007 Compared to 2006. Non-interest expense was $23,796,000 in 2007 compared to
$16,225,000 in 2006, an increase of $7,571,000 or 47%. The increase in
non-interest expense was primarily due to the acquisition of Fidelity. The
largest component of the increase in non-interest expense was salaries and
employee benefits which amounted to $13,109,000 in 2007 compared to $10,288,000
in 2006, an increase of $2,821,000 or 27%. As of December 31, 2007, the number
of full time equivalent employees was 210 compared to 157 as of December 31,
2006. The second largest component of the increase in non-interest expense was
occupancy and equipment expense which amounted to $3,663,000 in 2007 compared to
$2,420,000 in 2006, an increase of $1,243,000 or 51%. The increase in occupancy
and equipment expense is the result of the addition of six branch offices from
the acquisition of Fidelity and the opening of a branch office in Shelby
Township, Michigan.
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.
INCOME TAX PROVISION
2007 Compared to 2006. Income tax expense was $1,856,000 in 2007 compared to
$3,940,000 in 2006, a decrease of $2,084,000 or 53%. The decrease was primarily
due to the decrease in income before federal income tax and the expiration of a
loss carryforward. The effective tax rate increased to 37% in 2007 from 33.5% in
2006 due primarily to the expiration of a loss carry forward. Refer to Note L of
the Notes to Consolidated Financial Statements for additional information.
2006 Compared to 2005. 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.
58
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2007 AND DECEMBER 31, 2006
Assets. Total assets at December 31, 2007 were $1,046,981,000 compared to
$855,931,000 at December 31, 2006, an increase of $191,050,000 or 22%. The
increase was primarily due to the acquisition of Fidelity. The Corporation
acquired Fidelity on January 4, 2007 for $70.5 million. At acquisition, Fidelity
had assets of approximately $220.4 million.
Securities Available for Sale. Total securities available for sale, at December
31, 2007 were $8,902,000 compared to $5,878,000 at December 31, 2006, an
increase of $3,024,000 or 51%. The increase was primarily due to the purchase of
US Treasury securities that are utilized to collateralize certain deposits. The
Bank's portfolio of securities available for sale has an amortized cost and a
fair value of $8.9 million. The securities at December 31, 2007 are as follows
(in thousands):
December 31, 2007
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
US Treasury and Government- sponsored
entity securities $ 7,809 $ 19 $ (10) $7,818
Municipal bonds 758 16 -- 774
Mortgage backed securities 305 5 -- 310
--------- ---------- ---------- ------
Totals $ 8,872 $ 40 $ (10) $8,902
========= ========== ========== ======
A maturity and repricing schedule of the securities portfolio at December 31,
2007 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 and
Government-sponsored entity
securities $7,818 4.27% $ -- -- $ -- -- $7,818
Municipal securities -- -- 774 4.08% -- -- 774
Mortgage backed securities -- -- 170 5.70% 140 6.13% 310
------ -------- ------ -------- ------ -------- ------
Totals $7,818 $ 944 $ 140 $8,902
====== ====== ====== ======
The entire portfolio has a net unrealized gain of $30,000. The unrealized gain
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.
59
Loans. Total loans at December 31, 2007 were $952,084,000 compared to
$756,420,000 at December 31, 2006, an increase of $195,664,000 or 26%. The
components of the outstanding balances for the years ended December 31, are as
follows (in thousands):
2007 2006 2005 2004 2003
-------- -------- -------- -------- --------
Consumer loans $ 35,833 $ 32,282 $ 35,041 $ 42,149 $ 25,200
Commercial, financial, & other 174,958 124,523 106,900 115,651 62,844
Land development loans - residential 63,639 65,460 58,943 26,198 27,196
Land development loans - non residential 10,156 14,633 -- -- --
Construction loans - residential 33,768 30,988 37,806 28,269 16,839
Construction loans - non residential 40,187 38,662 47,384 29,176 19,972
Commercial real estate mortgages 539,306 401,924 323,666 296,934 200,463
Residential real estate mortgages 54,237 47,948 47,297 49,185 48,444
-------- -------- -------- -------- --------
$952,084 $756,420 $657,037 $587,562 $400,958
======== ======== ======== ======== ========
The increase in loans during 2007 was primarily due to the acquisition of
Fidelity. The largest increases occurred in the commercial real estate mortgage
and commercial, financial and other categories.
The Bank expects the percentage of total commercial loans to increase as a
percentage of the loan portfolio in 2008 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's high standards for credit quality and well-seasoned group of commercial
lenders.
60
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, 2007 is listed below (in thousands):
Within Three to One to After
Three Twelve Five Five
Months Months Years Years Total
-------- -------- -------- ------- --------
Consumer loans $ 23,216 $ 1,109 $ 10,955 $ 123 $ 35,403
Commercial, financial & other 93,252 9,827 60,903 9,915 173,897
Land development loans - residential 34,627 16,858 3,586 34 55,105
Land development loans - non-residential 8,238 915 1,003 -- 10,156
Construction loans - residential 28,515 619 452 -- 29,586
Construction loans - non-residential 28,639 -- 5,778 5,770 40,187
Commercial real estate mortgages 53,382 64,038 396,375 22,090 535,885
Residential real estate mortgages 2,434 14,714 27,848 8,752 53,748
-------- -------- -------- ------- --------
$272,303 $108,080 $506,900 $46,684 933,967
======== ======== ======== =======
Non-accrual loans 18,117
--------
Total loans $952,084
========
Loans at fixed interest rates $35,747 $ 96,896 $475,252 $46,571 654,466
Loans at variable interest rates 236,556 11,184 31,648 113 279,501
-------- -------- -------- ------- --------
$272,303 $108,080 $506,900 $46,684 933,967
======== ======== ======== =======
Non-accrual loans 18,117
--------
Total loans $952,084
========
Variable rate loans comprise 30% 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 D of the Notes to the Consolidated Financial
Statements for additional information.
The following is a summary of non-performing and problem loans (in thousands):
2007 2006 2005
------- ------ ------
Over 90 days past due and still accruing $ 884 $2,101 $ 189
Non-accrual loans 18,117 5,560 984
------- ------ ------
Total non performing loans $19,001 $7,661 $1,173
======= ====== ======
61
Non-accrual loans at December 31, 2007 were $18,117,000. The increase in
non-accrual loans during the year ended December 31, 2007 is primarily due to
the downgrading forty loans with a balance of $16,068,000 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 $76,000 at
December 31, 2007. Charge-offs in the amount of $3,229,000 were recorded on
these loans by the Corporation during 2007. 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. The distribution of loans downgraded to
non-accrual status during 2007 (dollars, in thousands) is as follows:
Number of
Loans Balance
--------- -------
Consumer loans 3 $ 279
Commercial, financial, & other 11 1,062
Construction - residential property 8 3,557
Construction - non residential property -- --
Land development loans - residential property 10 8,534
Land development loans - non residential property -- --
Commercial real estate mortgages 5 2,226
Residential real estate mortgages 3 410
--------- -------
Total loans downgraded to non-accrual status 40 $16,068
========= =======
The collapse of the residential real estate market in Southeastern Michigan has
impacted our portfolio of land development and construction loans and is the
primary cause of the increase in non-performing loans. At the time of
origination, these loans were well-collateralized loans with well-established
real estate developers and home builders. However, the underlying value of our
collateral related to these types of loans has declined as the demand for new
residential construction in Southeastern Michigan has diminished dramatically
and the impact on our loan portfolio is expected to continue. The distribution
of non-accrual loans by loan type (dollars, in thousands) is as follows at
December 31, 2007:
Number of
Loans Balance
--------- -------
Consumer loans 5 $431
Commercial, financial, & other 11 1,062
Construction - residential property 9 4,181
Construction - non residential property -- --
Land development loans - residential property 10 8,534
Land development loans - non residential property -- --
Commercial real estate mortgages 9 3,420
Residential real estate mortgages 4 489
--------- -------
Total non-accrual loans 48 $18,117
========= =======
62
Allowance for Loan Losses. The allowance for loan losses at December 31, 2007
was $10,617,000 compared to $7,775,000 at December 31, 2006, an increase of
$2,842,000 or 37%. The increase was primarily due to the acquisition of Fidelity
and provision for loan losses made during the period. The large increase in
provision for loan losses during 2007 was primarily the result of net
charge-offs and more problem loans during the year. Net charge-offs amounted to
$4,683,000 during 2007. These charge-offs were primarily related to loans
financing the development and construction of residential property. The collapse
of the value of the residential real estate market in Southeastern Michigan has
negatively impacted the underlying collateral value of our portfolio of
residential, land development and construction loans. While these loans were
well collateralized when they were made, the market value of the underlying
collateral has declined dramatically. This downturn in the residential real
estate market is expected to continue and management expects the decline in the
market value of our collateral to continue. The allowance for loan losses was
based upon management's assessment of relevant factors, including specific
borrower situations and estimated collateral values, loan growth, types and
amounts of non-performing loans, historical and anticipated loss experience on
such types of loans, and current economic conditions. Transactions in the
allowance for loan losses for the years ended December 31, are as follows (in
thousands):
2007 2006 2005 2004 2003
------- ------ ------ ------ ------
Balance, beginning of year $ 7,775 $6,808 $5,884 $4,314 $2,875
Allowance on loans acquired 1,704 -- -- 184 --
Less charge-offs:
Consumer loans 226 24 112 31 38
Commercial, financial & other 914 139 169 -- 141
Construction loans - residential 1,291 -- -- -- 50
Land development loans - residential 1,665 -- -- -- --
Commercial real estate mortgages 662 36 86 -- 124
Residential real estate mortgages 320 38 -- 100 --
Plus recoveries:
Consumer loans 25 17 37 12 13
Commercial, financial & other 224 218 131 44 30
Construction loans - residential 6 -- -- -- 50
Land development loans - residential -- -- -- -- --
Commercial real estate mortgages 140 26 10 61 --
Residential real estate mortgages -- -- 32 -- --
------- ------ ------ ------ ------
Net charge-offs (recoveries) 4,683 (24) 157 14 260
Provision for loan losses 5,821 943 1,081 1,400 1,699
------- ------ ------ ------ ------
Balance at end of period $10,617 $7,775 $6,808 $5,884 $4,314
======= ====== ====== ====== ======
Allowance to total loans 1.12% 1.03% 1.04% 1.00% 1.08%
======= ====== ====== ====== ======
Net Charge-offs (recoveries) to average loans 0.50% 0.00% 0.02% 0.00% 0.08%
======= ====== ====== ====== ======
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.
63
The allocation of the allowance for loan losses as of December 31, 2007 is as
follows (in thousands):
Total
-------------------------------------------------------
2007 2006 2005 2004 2003
------- ------ ------ ------ ------
Consumer loans $ 453 $ 470 $ 512 $ 551 $ 337
Commercial, financial, & other 1,404 1,462 1,527 1,498 941
Land development loans - residential 2,215 1,228 566 347 299
Land development loans - non-residential 117 146 -- -- --
Construction loans - residential 714 366 311 402 211
Construction loans - non-residential 553 434 517 382 260
Commercial real estate mortgages 4,671 3,270 3,065 2,302 1,799
Residential real estate mortgages 490 398 310 402 467
------- ------ ------ ------ ------
$10,617 $7,775 $6,808 $5,884 $4,314
======= ====== ====== ====== ======
Percent of allowance for loan losses in each category
to total allowance for loan losses
-------------------------------------------------------
2007 2006 2005 2004 2003
------- ------ ------ ------ ------
Consumer loans 4.27% 6.05% 7.52% 9.36% 7.81%
Commercial, financial, & other 13.22% 18.80% 22.43% 25.46% 21.81%
Land development loans - residential 20.86% 15.80% 8.31% 5.90% 6.93%
Land development loans - non-residential 1.10% 1.88% --% --% --%
Construction loans - residential 6.73% 4.71% 4.57% 6.83% 4.89%
Construction loans - non-residential 5.21% 5.58% 7.59% 6.49% 6.03%
Commercial real estate mortgages 44.00% 42.06% 45.02% 39.12% 41.70%
Residential real estate mortgages 4.62% 5.12% 4.55% 6.83% 10.83%
------- ------ ------ ------ ------
100.00% 100.00% 100.00% 100.00% 100.00%
======= ====== ====== ====== ======
Percent of loans in each category to total loans
-------------------------------------------------------
2007 2006 2005 2004 2003
------- ------ ------ ------ ------
Consumer loans 3.76% 4.27% 5.33% 7.17% 6.28%
Commercial, financial, & other 18.38% 16.46% 16.27% 19.68% 15.67%
Land development loans - residential 6.68% 8.65% 8.97% 4.46% 6.78%
Land development loans - non-residential 1.07% 1.93% --% --% --%
Construction loans - residential 3.55% 4.10% 5.75% 4.81% 4.20%
Construction loans - non-residential 4.22% 5.11% 7.21% 4.97% 4.98%
Commercial real estate mortgages 56.64% 53.14% 49.26% 50.54% 50.00%
Residential real estate mortgages 5.70% 6.34% 7.20% 8.37% 12.08%
------- ------ ------ ------ ------
100.00% 100.00% 100.00% 100.00% 100.00%
======= ====== ====== ====== ======
64
The increase in the allocation of the allowance for loan losses to land
development loans-residential and commercial construction loans-residential at
December 31, 2007 compared to December 31, 2006 is primarily due to our
impairment evaluation of the non-accrual loans discussed earlier. The increase
in the allocation of the allowance for loan losses commercial real estate
mortgage loans at December 31, 2007 compared to December 31, 2006 is primarily
due to loans and the allowance for loan loss that was transferred from Fidelity.
Bank Premises and Equipment. Bank premises and equipment at December 31, 2007
were $22,782,000 compared to $14,293,000 at December 31, 2006, an increase of
$8,489,000 or 59%. The increase was primarily due to the acquisition of Fidelity
and the opening of a branch office in Shelby Township, Michigan.
Real Estate Owned. Real estate owned at December 31, 2007 was $6,319,000,
compared to $52,000 at December 31, 2006, an increase of $6,267,000. Real estate
owned at December 31, 2007 is comprised of eleven properties with an aggregate
appraised value of $7,011,000. The Bank expects real estate owned to increase
during 2008 based on the increase in non-accrual loans during 2007. During 2007,
the Corporation recorded loss on the sale of real estate of $26,000 and
write-downs in the value of real estate in the amount of $701,000 to address the
decline in property values after the Bank took ownership of real estate.
Goodwill and Other Intangible Assets. Goodwill and other intangible assets were
$45,161,000 at December 31, 2007, compared to $7,514,000 at December 31, 2006,
an increase of $37,647,000 or 501%. The increase was due to the acquisition of
Fidelity. The Bank has intangible assets for the estimated value of core deposit
accounts and borrower relationships acquired in the acquisition of Fidelity Bank
and 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 $7,792,000 and is being amortized over a period of ten
years. The borrower relationship intangible was valued to $5,178,000 and is
being amortized over a period of 17 years. At December 31, 2007, the core
deposit intangible and borrower relationship intangible amounted to $6,612,000
and $4,521,000, respectively.
Gross
Carrying Accumulated
Amount Amortization
-------- ------------
Core deposit intangible from acquisition of:
Bank of Washtenaw $ 929 $ 399
Fidelity Financial Corporation of Michigan 6,863 781
-------- ------------
Total core deposit intangible 7,792 1,180
-------- ------------
Borrower relationship intangible from acquisition of:
Bank of Washtenaw 1,620 367
Fidelity Financial Corporation of Michigan 3,558 290
-------- ------------
Total borrower relationship intangible 5,178 657
-------- ------------
Total intangible assets $ 12,970 $ 1,837
======== ============
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 $34.0 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, 2007.
Management believes that the accounting for goodwill and other intangible assets
involves a higher degree of judgment than most other significant accounting
policies. Statement of Financial Accounting Standards (SFAS) No. 142,
"Accounting for Goodwill and Other Intangible Assets," establishes standards for
the amortization of acquired intangible assets and the impairment assessment of
goodwill. Our goodwill arose from our acquisitions of Bank of Washtenaw in 2004
and Fidelity in 2007, and it represents the value attributable to unidentifiable
intangible assets in the businesses acquired. Goodwill relates to the value
inherent in the banking business and that value is dependent upon our ability to
provide quality, cost effective banking services in a competitive marketplace.
A decrease in earnings resulting from a decline in the customer base, the
inability to deliver cost effective services over sustained periods or
significant credit problems can lead to impairment of goodwill that could
adversely impact earnings in future periods. SFAS No. 142 requires an annual
evaluation of goodwill for impairment, or more frequently if events or changes
in circumstances indicate that the asset might be impaired. We engage a
valuation firm to assist in our annual evaluation of goodwill for impairment,
and we also engaged a valuation firm to help determine the values of the core
deposit and borrower relationship intangible assets acquired in the Bank of
Washtenaw and Fidelity acquisitions.
Accrued Interest Receivable. Accrued interest receivable at December 31, 2007
was $3,816,000 compared to $3,337,000 at December 31, 2006, an increase of
$479,000 or 14%. The increase was primarily due to the acquisition of Fidelity.
Other Assets. Other assets at December 31, 2007 were $5,664,000 compared to
$3,071,000 at December 31, 2006, an increase of $2,593,000 or 84%. The increase
was largely due to an increase in the Corporation's deferred tax asset.
65
Deposits. Total deposits at December 31, 2007 were $822,627,000 compared to
$633,216,000 at December 31, 2006, an increase of $189,411,000 or 30%. The
components of the outstanding balances and percentage increase in deposits from
2006 to 2007 are as follows (in thousands):
December 31, 2007 December 31, 2006
------------------ ------------------- Percent
Balance Percent Balance Percent Increase/(Decrease)
-------- ------- -------- ------- -------------------
Non-interest bearing:
Demand $ 83,594 10.16% $ 53,065 8.38% 57.53%
Interest bearing:
Checking 65,196 7.93% 62,770 9.91% 3.86%
Money market 106,145 12.90% 14,289 2.26% 642.84%
Savings 29,814 3.62% 42,169 6.66% -29.30%
Time, under $100,000 193,852 23.56% 130,898 20.67% 48.09%
Time, $100,000 and over 344,026 41.82% 330,025 52.12% 4.24%
-------- ------- -------- ------- -------------------
739,033 89.84% 580,151 91.62% 27.39%
-------- ------- -------- ------- -------------------
$822,627 100.00% $633,216 100.00% 29.91%
======== ====== ======== ====== ===================
The increase in deposits was primarily due to the acquisition of Fidelity. As a
result of the acquisition and deposit activity during 2007, the Bank increased
demand and money market accounts as a percentage of total deposits. The Bank
completed an annual birthday celebration in April 2007 and two deposits
promotions that featured time deposit products. Management developed these
campaigns to increase liquidity and name awareness.
The Bank's primary source of funds are retail deposits. The Bank also utilizes
public funds in the form of time deposits, $100,000 and over and brokered
deposits as sources of funds. In order to coordinate and manage these efforts,
the Bank has also designated a public funds officer. Public funds at December
31, 2007 were $111.4 million compared to $115.4 million at December 31, 2006.
There were 36 and 31 entities with public funds on deposit at December 31, 2007
and 2006, respectively. The average term of time deposits invested with the Bank
by public units was 138 and 87 days at December 31, 2007 and 2006, respectively.
Brokered deposits were $32.8 million with an average rate of 4.89% at December
31, 2007, compared to $56.0 million with an average rate of 4.59% at December
31, 2006.
Final maturities of total time deposits are as follows (in thousands):
$100,000 and over Less than $100,000 Total
----------------- ------------------ --------
2008 $ 319,012 $ 178,039 $497,051
2009 8,625 5,549 $14,174
2010 8,028 3,159 $11,187
2011 7,595 6,517 $14,112
2012 766 588 $1,354
----------------- ------------------ --------
Totals $ 344,026 $ 193,852 $537,878
================= ================== ========
66
The following is a summary of the distribution and weighted average interest
rate of deposits at December 31, 2007 and 2006 (in thousands):
2007 2006
-------------------- --------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- -------- -------- --------
Non-interest bearing:
Demand $83,594 -- $ 53,065 --
-------- --------
Interest bearing:
Checking 65,196 1.01% 62,770 3.35%
Money market 106,145 2.43% 14,289 2.56%
Savings 29,814 1.90% 42,169 1.73%
Time, under $100,000 193,852 4.95% 130,898 4.59%
Time, $100,000 and over 344,026 4.89% 330,025 5.03%
-------- --------
739,033 580,151
-------- --------
$822,627 $633,216
======== ========
The Bank continues a strategy of shifting maturing time deposits into other
savings products.
Federal Funds Purchased. Federal funds purchased were $30,100,000 at December
31, 2007 compared to $37,300,000 at December 31, 2006. 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, 2007 primarily because of
the expectation that interest rates would continue to decline during 2008.
Federal Home Loan Bank Advances. Federal Home Loan Bank advances at December 31,
2007 were $41,370,000 compared to $25,561,000 at December 31, 2006, an increase
of $15,809,000 or 62%. Additional advances from the Federal Home Loan Bank were
utilized during 2007 in order to decrease the Bank's cost of funds.
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 J of
the Notes to the Consolidated Financial Statements for additional information.
Other Borrowings. Other borrowings were $480,000 at December 31, 2007 compared
to $619,000 at December 31, 2006, a decrease of $139,000 or 22%. 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.
Accrued Interest Payable. Accrued interest payable at December 31, 2007 was
$3,168,000 compared to $3,734,000 at December 31, 2006, a decrease of $566,000
or 15%. The decrease was primarily due to the shifting of the deposit mix
towards short-term time deposits during 2007.
Other Liabilities. Other liabilities were $1,688,000 at December 31, 2007
compared to $516,000 at December 31, 2006, an increase of $1,172,000 or 227%.
The increase was primarily due to an increase in accrued expenses.
67
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. Please refer to Note K of the Notes to the Consolidated Financial
Statements for additional information.
CAPITAL
Stockholders' equity at December 31, 2007 was $137,548,000 compared to
$144,985,000 as of December 31, 2006, a decrease of $7,437,000 or 5%. The
decrease was primarily due to the repurchase of outstanding common shares under
a stock repurchase program partially offset by net income. During 2007, the
Corporation repurchased 751,800 common shares at an average price of $14.37 per
share.
At December 31, 2007 and 2006, the Bank and Corporation exceeded all applicable
regulatory capital requirements as described in Note O 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 changes in 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.
68
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, 2007 which are expected
to mature or reprice in each of the time periods shown below.
Interest Rate Sensitivity Period
------------------------------------------------------------
(In thousands) 1-90 91-365 1-5 Over
Days Days Years 5 Years Total
---------- --------- -------- -------- --------
Earning assets
Federal funds sold $ 1,495 $ -- $ -- $ -- $ 1,495
Interest bearing deposits with
Banks 118 -- -- -- 118
Mortgage loans held for sale 1,316 -- -- -- 1,316
Securities available for sale 3,829 3,990 943 140 8,902
Federal Home Loan Bank stock 2,072 -- -- -- 2,072
Total loans, net of non-accrual 272,303 108,080 506,899 46,685 933,967
---------- --------- -------- -------- --------
Total earning assets 281,133 112,070 507,842 46,825 947,870
Interest bearing liabilities
Total interest bearing deposits 510,341 187,935 40,255 502 739,033
Federal Home Loan Bank advances -- 20,658 20,712 -- 41,370
Other Borrowings 30,580 -- -- -- 30,580
Subordinates debentures 10,000 -- -- -- 10,000
---------- --------- -------- -------- --------
Total interest bearing liabilities 550,921 208,593 60,967 502 820,983
---------- --------- -------- -------- --------
Net asset (liability) funding gap (269,788) (96,523) 446,875 46,323 $126,887
---------- --------- -------- -------- ========
Cumulative net asset (liability) funding
gap $ (269,788) $(366,311) $80,564 $126,887
========== ========= ======== ========
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; the
variability of interest rate sensitivity of 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.
69
We conducted an interest rate simulation as of December 31, 2007, that assumed a
gradual change in market rates occurred over the following twelve months. The
following table reflects the suggested impact on net interest income over the
next twelve months (dollars, in thousands):
Change in Net Interest Income
-----------------------------
Interest Rate Change Amount Percent
----------- -------------
+ 300 Basis Points $ 1,748 4.80%
+ 200 Basis Points 1,228 3.37%
+ 100 Basis Points 604 1.66%
- - 100 Basis Points (718) -1.97%
- - 200 Basis Points (1,598) -4.39%
- - 300 Basis Points (1,659) -4.55%
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, 2007 (in thousands):
Contractual Obligations
Payments Due By Period
------------------------------------------------------
Less Than 1-3 3-5 Over 5
1 Year Years Years Years Total
--------- ------- ------- ------- --------
Securities sold under agreements
to repurchase $ 480 $ -- $ -- $ -- $ 480
Certificates of deposit 497,051 25,361 15,466 -- 537,878
Long-term borrowings 20,851 20,303 216 -- 41,370
Lease commitments 757 1,322 402 -- 2,481
Subordinated debentures -- -- -- 10,000 10,000
--------- ------- ------- ------- --------
Totals $ 519,139 $46,986 $16,084 $10,000 $592,209
========= ======= ======= ======= ========
Unused Loan Commitments and Letters of Credit
Amount Of Commitment Expiration Per Period
------------------------------------------------------
Less Than 1-3 3-5 Over 5
1 Year Years Years Years Total
--------- ------- ------- ------- --------
Unused loan commitments $ 112,721 $16,439 $ 7,600 $16,276 $153,036
Standby letters of credit 3,535 1,880 2,000 -- 7,415
--------- ------- ------- ------- --------
Totals $ 116,256 $18,319 $ 9,600 $16,276 $160,451
========= ======= ======= ======= ========
70
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
Netteller Bill Pay
Remote Deposit Capture
Check 21
Electronic Cash Letter Delivery
During 2008, the Bank plans to implement the following technologies:
Electronic Statements Interactice
Cell Phone Banking
DirectLine OFX (Open Financial Exchange)
ATM/Debit Card On-Line Real Time Processing
Remote Deposit Lockbox Processing
Mutual Fund Sweeps
Netteller Positive Pay
71
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.
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
Fidelity Bank
DR. ROBERT C. SCHWYN
Physician
Oaklane Medical
OFFICERS
JOHN E. DEMMER
Chairman of the Board
MICHAEL J. ROSS
President and Chief Executive Officer
JEFFREY L. KARAFA
Vice President, Treasurer and Secretary
72
FIDELITY BANK
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.
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
Fidelity Bank
DR. ROBERT C. SCHWYN
Physician
Oaklane Medical
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
73
FIDELITY BANK
OFFICERS
FIRST VICE PRESIDENT
TERRENCE R. O'NEIL
First Vice President - Credit
VICE PRESIDENTS
GARY W. AMES, JR.
Vice President & Controller
KEVIN A. BANK
Vice President - Commercial Loans
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
FRANK J. FILECCIA
Vice President - Business Development
CYNTHIA A. FRAGA
Vice President - Commercial Loans
LEE E. FREELAND
Vice President - Sales Administration
JIHAD A. HACHEM
Vice President - Commercial Loans
ALLEN E. HEIMER
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
ELIZABETH A. PIZZO
Vice President - Human Resources
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
RICHARD K. VALLEE
Vice President - BSA and Security
SUSAN VETTRAINO
Vice President - Internal Controls
BRADY J. VIBERT
Vice President - Commercial Loans
JOHN W. WESTERHEIDE
Vice President - Commercial Loans
CHRISTOPHER E. WESTPHAL
Vice President - Commercial Loans
PAMELA G. WILKS
Vice President - Product Support
ASSISTANT VICE PRESIDENTS
DEBBY M. ASTERIOU
PATRICIA CARMONA
KAREN M. COVER
PATRICIA L. DANCIK
DONALD D. HARBIN
DAVID W. LESLIE
NADINE S. McMILLAN
DENIS T. NISSLE
MIHAI PARASCA
MARIAN Z. SMRCKA
FIRST LEVEL OFFICERS
STEPHENI C. AGUILA
MARK D. BOWERS
V. STACY BRANHAM
TERRENCE W. CARLSON
KAREN B. DEVRIES
DANIEL C. GILBERT
ANGELA HSU
MILY H. HUBENY
RICHARD T. JONES
SANDRA L. LETHBRIDGE
LISA M. LOBB
TIMOTHY D. SIERPIEN
CHARLES P. WASCZENSKI
CAROLYN A. WILKINS
74
FIDELITY BANK
SUBSIDIARIES
COMMUNITY BANK INSURANCE AGENCY, 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.
75
FIDELITY BANK
LOCATIONS
Ann Arbor / Eisenhower Banking Center Dearborn Heights Banking Center
250 West Eisenhower Parkway, Suite 100 24935 W. Warren Avenue
Ann Arbor, MI 48103 Dearborn Heights, MI 48127
Phone: (734) 302-1481 Phone: (313) 724-0100
Ann Arbor / Stadium Banking Center Dearborn Administrative and
2180 West Stadium Boulevard Regional Lending Center
Ann Arbor, MI 48103 1360 Porter Street
Phone: (734) 302-9165 Dearborn, MI 48124
Phone: (313) 565-5700
Auburn Hills Banking Center
3201 University Drive, Suite 180 Galleria Banking Center
Auburn Hills, MI 48326 200 Galleria Office Center
Phone: (248) 364-9700 Southfield, MI 48034
Phone: (248) 352-1580
Bingham Farms Banking Center
30700 Telegraph Plymouth Township Banking Center
Bingham Farms, MI 48025 44623 Five Mile
Phone: (248) 642-6757 Plymouth Township, MI 48170
Phone: (734) 454-1000
Birmingham Banking and Regional Lending Center
1040 E. Maple Saline Banking Center
Birmingham, MI 48009 450 E. Michigan Avenue
Phone: (248) 642-1901 Saline, MI 48176
Phone: (734) 429-3828
Bloomfield Township Banking Center
3681 W. Maple Shelby Township Banking Center
Bloomfield Township, MI 48301 7755 23 Mile Road
Phone: (248) 642-1903 Shelby Township, MI 48316
Phone: (586) 254-8700
Canton Township Banking Center
1325 N. Canton Center Road Southgate Banking Center
Canton, MI 48187 12820 Fort Street
Phone: (734) 981-0022 Southgate, MI 48195
Phone: (734) 284-3300
Clinton Township Banking Center
19100 Hall Road Southfield/Twelve Mile Banking Center
Clinton Township, MI 48038 20000 12 Mile Road
Phone: (586) 416-4400 Southfield, MI 48034
Phone: (248) 559-5779
Clinton Township Regional Lending Center
45000 River Ridge Drive, Suite 110 Travelers Tower Banking Center
Clinton Township, MI 48038 26555 Evergreen
Phone: (586) 416-0200 Southfield, MI 48034
Phone: (248) 351-8311
Dearborn / Main Office Banking Center
22290 Michigan Avenue Bank Operations Center
Dearborn, MI 48124 4000 Allen Road
Phone: (313) 274-1000 Allen Park, MI 48101
Phone: (313) 381-3200
76
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@fidbank.com.
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on Tuesday, May 20, 2008, at
Park Place, 23400 Park Avenue, Dearborn, Michigan, at 4:00 p.m.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Crowe Chizek and 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.fidbank.com
QUARTERLY COMMON STOCK PRICE INFORMATION
High Low Close
-------- -------- --------
2007
First quarter $ 19.59 $ 17.00 $ 17.49
Second quarter 18.26 15.03 16.95
Third quarter 17.90 12.20 12.91
Fourth quarter 13.48 7.10 7.73
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
All per share amounts presented have been adjusted to reflect the issuance of
stock dividends.
77
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
---------------------- -------------------------- -----------
12/31/2002 $ 100.00 $ 100.00 $ 100.00
12/31/2003 $ 135.28 $ 149.52 $ 128.64
12/31/2004 $ 218.66 $ 162.72 $ 147.22
12/31/2005 $ 204.61 $ 166.18 $ 143.82
12/31/2006 $ 173.18 $ 182.57 $ 161.41
12/31/2007 $ 70.46 $ 197.98 $ 127.92
78
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 Market Holdings, 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
E*Trade Capital Markets, LLC
One Financial Place
440 S. Lasalle St., Suite 3030
Chicago, IL 60605
312-294-7846
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) 719-7448
79
(DEAR NASDAQ LISTED LOGO)
DEARBORN BANCORP, INC.
1360 Porter Street
Dearborn, Michigan 48124
Phone: (313) 565-5700
www.fidbank.com