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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the Quarterly period ended June 30, 2002.
Commission file number 000-24478.
DEARBORN BANCORP, INC.
----------------------
(Exact name of registrant as specified in its charter)
Michigan 38-3073622
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
22290 Michigan Avenue, Dearborn, MI 48123-2247
-----------------------------------------------------
(Address of principal executive office) (Zip Code)
(313) 274-1000
--------------
(Registrant's telephone number, including area code)
N/A
-----
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----------- ----------
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of July 31, 2002.
Class Shares Outstanding
----- -------------------
Common Stock 2,471,609
DEARBORN BANCORP, INC.
INDEX
PART I. Financial Information:
Item 1. Financial Statements
The following consolidated financial statements of Dearborn
Bancorp, Inc. and its subsidiary included in this report are: Page
----
Independent Accountants' Report 3
Consolidated Balance Sheets - June 30, 2002, December 31, 2001
and June 30, 2001 4
Consolidated Statements of Income - For the Three and Six
Months Ended June 30, 2002 and 2001 5
Consolidated Statements of Comprehensive Income - For
the Three and Six Months Ended June 30, 2002 and 2001 6
Consolidated Statements of Cash Flows - For the
Six Months Ended June 30, 2002 and 2001 7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Liquidity and Capital 12-24
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25-26
PART II. Other Information:
Pursuant to SEC rules and regulations, the following item(s) are
included with the Form 10-Q Report:
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K
Pursuant to SEC rules and regulations, the following items are omitted
from this Form 10-Q as inapplicable or to which the answer is negative:
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 5. Other Information
SIGNATURES 28
CERTIFICATION 29
2
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
Dearborn Bancorp, Inc.
Dearborn, Michigan
We have reviewed the consolidated balance sheets of Dearborn Bancorp, Inc. as of
June 30, 2002 and 2001, and the related consolidated statements of income and
comprehensive income for the three and six month periods ended June 30, 2002 and
2001, and the related statements of cash flows for the six month periods ended
June 30, 2002 and 2001. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Grand Rapids, Michigan
July 30, 2002
3
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars, in thousands)
06/30/02 12/31/01 06/30/01
-------------- -------------- ----------------
ASSETS
Cash and cash equivalents
Cash and due from banks $3,726 $3,600 $3,967
Federal funds sold 8,779 4,887 19,638
Interest bearing deposits with banks 2,645 7,387 6,257
-------------- -------------- ----------------
Total cash and cash equivalents 15,150 15,874 29,862
Mortgage loans held for sale 406 2,915 4,636
Securities, available for sale 41,713 21,652 20,606
Federal Home Loan Bank stock 1,000 1,000 450
Loans
Loans 226,800 180,892 141,303
Allowance for loan losses (2,313) (1,922) (1,373)
-------------- -------------- ----------------
Net loans 224,487 178,970 139,930
Premises and equipment, net 4,739 4,746 4,317
Accrued interest receivable 1,329 1,085 1,015
Other assets 716 623 215
-------------- -------------- ----------------
Total assets $289,540 $226,865 $201,031
============== ============== ================
LIABILITIES
Deposits
Non-interest bearing deposits $28,785 $21,441 $22,045
Interest bearing deposits 210,742 156,040 149,139
-------------- -------------- ----------------
Total deposits 239,527 177,481 171,184
Other liabilities
Federal Home Loan Bank advances 20,000 20,000 ---
Mortgage payable --- --- 453
Accrued interest payable 604 804 820
Other liabilities 418 677 342
-------------- -------------- ----------------
Total liabilities 260,549 198,962 172,799
STOCKHOLDERS' EQUITY
Common stock - 5,000,000 shares authorized;
2,471,609 shares at 06/30/02; 2,471,609 at
12/31/01; and 2,578,213 shares at 06/30/01 28,636 27,675 28,173
Retained earnings 210 168 23
Accumulated other comprehensive income 145 60 36
-------------- -------------- ----------------
Total stockholders' equity 28,991 27,903 28,232
-------------- -------------- ----------------
Total liabilities and stockholders' equity $289,540 $226,865 $201,031
============== ============== ================
The accompanying notes are an integral part of these consolidated financial
statements
4
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share and per share data) Three Months Ended Six Months Ended
06/30/02 06/30/01 06/30/02 06/30/01
----------- ------------ ------------ ------------
Interest income
Interest on loans, including fees $4,030 $2,964 $7,680 $5,900
Interest on securities, available for sale 329 215 574 670
Interest on interest bearing deposits with banks 37 115 58 174
Interest on federal funds 53 218 130 438
----------- ------------ ------------ ------------
Total interest income 4,449 3,512 8,442 7,182
Interest expense
Interest on deposits 1,705 1,946 3,204 4,001
Interest on other borrowings 224 8 449 16
----------- ------------ ------------ ------------
Total interest expense 1,929 1,954 3,653 4,017
Net interest income 2,520 1,558 4,789 3,165
Provision for loan losses 263 125 488 255
----------- ------------ ------------ ------------
Net interest income after provision for loan losses 2,257 1,433 4,301 2,910
----------- ------------ ------------ ------------
Non-interest income
Service charges on deposit accounts 88 68 164 130
Fees for other services to customers 8 9 16 16
Gain on the sale of loans 133 281 355 441
Gain (loss) on the sale of securities, available --- --- --- (5)
for sale
Other income 9 --- 16 2
----------- ------------ ------------ ------------
Total non-interest income 238 358 551 584
Non-interest expenses
Salaries and employee benefits 1,096 793 2,104 1,599
Occupancy and equipment expense 225 128 443 241
Advertising and marketing 57 47 119 83
Stationery and supplies 49 52 113 93
Professional services 69 73 122 146
Data processing 68 50 122 98
FDIC insurance premiums 7 7 15 14
Other operating expenses 128 120 296 213
----------- ------------ ------------ ------------
Total non-interest expenses 1,699 1,270 3,334 2,487
Income before income tax provision 796 521 1,518 1,007
Income tax provision 270 175 515 341
----------- ------------ ------------ ------------
Net income $526 $346 $1,003 $666
=========== ============ ============ ============
Share and per share data:
Net income - basic $0.21 $0.13 $0.41 $0.26
Net income - diluted $0.20 $0.13 $0.39 $0.25
Weighted average number of shares outstanding - basic 2,471,609 2,588,337 2,471,609 2,601,754
Weighted average number of shares outstanding - diluted 2,601,732 2,631,704 2,584,033 2,632,427
The accompanying notes are an integral part of these consolidated financial
statements.
5
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands) Three Months Ended Six Months Ended
06/30/02 06/30/01 06/30/02 06/30/01
----------- ----------- ---------- -----------
Net income $526 $346 $1,003 $666
Other comprehensive income, net of tax
Unrealized gains on securities
Unrealized holding gains arising during period 261 8 129 290
Less: reclassification adjustment for losses
included in net income --- --- --- 5
Tax effects (89) (3) (44) (100)
----------- ----------- ---------- -----------
Other comprehensive income 172 5 85 195
----------- ----------- ---------- -----------
Comprehensive income $698 $351 $1,088 $861
=========== =========== ========== ===========
6
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands) Six Months Ended
6/30/02 6/30/01
-------------- --------------
Cash flows from operating activities
Interest and fees received $8,198 $7,701
Interest paid (3,853) (3,211)
Taxes paid (709) (330)
Proceeds from sale of mortgages held for sale 23,471 33,547
Origination of mortgages held for sale (20,607) (36,791)
Cash paid to suppliers and employees (3,062) (3,248)
-------------- --------------
Net cash provided by (used in) operating activities 3,438 (2,332)
Cash flows from investing activities
Proceeds from maturities of securities available for sale 10,782 35,870
Proceeds from sales of securities available for sale --- 13,755
Proceeds from repayments of securities available for sale 253 ---
Purchases of securities available for sale (31,050) (18,080)
Increase in loans, net of payments received (46,005) (13,334)
Purchases of property and equipment (188) (1,308)
-------------- --------------
Net cash provided by (used in) investing activities (66,208) 16,903
Cash flows from financing activities
Net increase in non-interest bearing deposits 7,344 2,892
Net increase in interest bearing deposits 54,702 4,171
Principal payments on mortgage payable --- (14)
Purchase of treasury stock --- (392)
-------------- --------------
Net cash provided by financing activities 62,046 6,657
Increase (decrease) in cash and cash equivalents (724) 21,228
Cash and cash equivalents at the beginning of the period 15,874 8,634
-------------- --------------
Cash and cash equivalents at the end of the period $15,150 $29,862
============== ==============
Reconciliation of net income to net cash provided by
(used in) operating activities
Net income $1,003 $666
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities
Provision for loan losses 488 255
Depreciation and amortization expense 193 150
Accretion of discount on securities, available for sale (4) (11)
Amortization of premium on securities, available for sale 87 60
Loss on the sale of securities, available for sale --- 5
(Increase) decrease in mortgages held for sale 2,509 (3,551)
(Increase) decrease in interest receivable (244) 519
Decrease in interest payable (259) (6)
Increase in other assets (135) (60)
Decrease in other liabilities (200) (359)
-------------- --------------
Net cash provided by (used in) operating activities $3,438 ($2,332)
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
7
DEARBORN BANCORP, INC.
FORM 10-Q (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting and Reporting Policies
The consolidated financial statements of Dearborn Bancorp, Inc. (the
"Corporation") include the consolidation of its only subsidiary,
Community Bank of Dearborn (the "Bank"). The accounting and reporting
policies of the Corporation are in accordance with generally accepted
accounting principles and conform to practice within the banking
industry.
The consolidated financial statements of the Corporation as of June 30,
2002 and 2001, and December 31, 2001 and for the three and six month
periods ended June 30, 2002 and 2001 reflect all adjustments,
consisting of normal recurring items which are in the opinion of
management, necessary for a fair presentation of the results for the
interim period. The operating results for the periods are not
necessarily indicative of results of operations for the entire year.
The consolidated financial statements as of June 30, 2002 and 2001, and
for the three and six months ended June 30, 2002 and 2001 included
herein have been prepared by the Corporation, without an audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in interim financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. These financial statements
should be read in conjunction with the financial statements and notes
thereon included in the Corporation's 2001 Annual Report to
Stockholders on Form 10-K.
8
B. Securities Available For Sale
The amortized cost and estimated market value of securities available
for sale are as follows (in thousands):
June 30, 2002
--------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- --------------- --------------- ----------------
US Treasury securities $2,037 $5 $--- $2,042
Mortgage backed securities 2,720 92 --- 2,812
Municipal securities 13,792 --- --- 13,792
Corporate debt securities 18,944 178 (55) 19,067
Preferred stock 4,000 --- --- 4,000
----------------- --------------- --------------- ----------------
Totals $41,493 $275 ($55) $41,713
================= =============== =============== ================
December 31, 2001
--------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- --------------- --------------- ----------------
US Treasury securities $2,069 $--- $--- $2,069
Mortgage backed securities 2,970 50 (7) $3,013
Municipal securities 1,476 1 --- $1,477
Corporate debt securities 11,046 73 (26) $11,093
Preferred stock 4,000 --- --- $4,000
----------------- --------------- --------------- ----------------
Totals $21,561 $124 ($33) $21,652
================= =============== =============== ================
The amortized cost and estimated market value of securities available
for sale at June 30, 2002 by contractual maturity are shown below (in
thousands):
Estimated
Amortized Market
Cost Value
--------------- ----------------
Due in three months or less $1,001 $1,005
Due in three months through one year 7,829 7,863
Due in one year through five years 25,943 26,033
Due in over ten years 4,000 4,000
Mortgage backed securities 2,720 2,812
--------------- ----------------
Totals $41,493 $41,713
=============== ================
9
C. Stock Option Plan
Options to buy common stock are granted to officers and employees under
a Stock Option Plan which provides for issue of up to 578,813 shares.
Exercise price is the market price at date of grant. The maximum option
term is ten years, and options grant after six months from the date of
grant. If an option expires or terminates without having been
exercised, such option becomes available for future grant under the
Plan.
A summary of the option activity for the six months ended June 30, 2002
is as follows:
Weighted
Weighted Average Fair
Available Average Value of
For Options Exercise Options
Grant Outstanding Price Granted
----- ----------- ----- -------
Outstanding at January 1, 2002 243,643 312,016 $8.10
Granted (118,125) 118,125 11.37 $4.90
------------------ ---------------- --------------
Outstanding at June 30, 2002 125,518 430,141 $9.00
For the options outstanding at June 30, 2002, the range of exercise
prices was $5.88 to $11.37 per share with a weighted-average remaining
contractual term of 7.7 years. At June 30, 2002, 312,016 options were
exercisable at weighted average exercise price of $8.10 per share.
Had compensation cost for stock options been measured using the fair
value method of FASB Statement No. 123, net income and earnings per
share would have been the pro forma amounts indicated below for the six
months ended June 30, 2002 and 2001 (in thousands, except per share
data). The pro forma effects may increase in the future if more options
are granted.
For the Six Months Ended June 30,
2002 2001
---------------- ------------------
Net income
As reported $1,003 $666
Pro forma 450 362
Basic income per share
As reported $0.41 $0.26
Pro forma 0.18 0.12
Diluted income per share
As reported 0.39 0.25
Pro forma 0.17 0.12
10
The pro forma effects are computed with option pricing models, using
the following weighted average assumptions as of grant date for grants
during the six month periods ended June 30, 2002 and 2001.
2002 2001
------------------ -------------------
Risk-free interest rate 4.78% 5.15%
Expected option life 8 years 8 years
Dividend yield 0.00% 0.00%
Expected volatility of stock price 26.07% 25.50%
All share and per share amounts have been adjusted for stock dividends.
11
PART I - FINANCIAL INFORMATION
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis are intended to address significant
factors affecting the financial condition and results of operations of the
Corporation. The discussion provides a more comprehensive review of the
financial position and operating results than can be obtained from a reading of
the financial statements and footnotes presented elsewhere in this report.
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that are based on management's
beliefs, assumptions, current expectations, estimates and projections about the
financial services industry, the economy, and about the Corporation and Bank.
Words such as "anticipates", "believes", "estimates", "expects", "forecasts",
"intends", "is likely", "plans", "projects", variations of such words and
similar expressions are intended to identify such forward- looking statements.
These statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions ("Future Factors") that are difficult to
predict with regard to timing, extent, likelihood and degree of occurrence.
Therefore, actual results and outcomes may materially differ from what may be
expressed or forecasted in such forward-looking statements. The Corporation
undertakes no obligation to update, amend or clarify forward-looking statements,
whether as a result of new information, future events (whether anticipated or
unanticipated), or otherwise.
Future Factors include changes in interest rates and interest rate
relationships; demand for products and services; the degree of competition by
traditional and non-traditional competitors; changes in banking regulation;
changes in tax laws; changes in prices, levies and assessments; the impact of
technological advances; governmental and regulatory policy changes; the outcomes
of contingencies; trends in customer behavior as well as their ability to repay
loans; and changes in the national and local economy. These are representative
of the Future Factors that could cause a difference between an ultimate actual
outcome and a preceding forward-looking statement.
12
GENERAL
The Corporation was formed in 1992 and the Bank was formed in 1993. Principal
operations of the Bank commenced on February 28, 1994 when the Bank opened for
business at its main office. Subsequently, branch offices were opened in
Dearborn Heights and Plymouth Township. During 2001, the Bank opened its fourth
and fifth offices, located at 1325 N. Canton Center Road, Canton Township,
Michigan and 45000 River Ridge Drive in Clinton Township, Michigan,
respectively. Additionally, Community Bank Mortgage, Inc., a mortgage company,
was formed and began operations in 2001. The Bank formed Community Bank Audit
Services, Inc., a subsidiary that offers internal audit and compliance services,
on March 26, 2002.
RESULTS OF OPERATIONS
The Corporation reported net income of $526,000 and $1,003,000 for the three and
six month periods ended June 30, 2002, compared to net income of $346,000 and
$666,000 for the three and six month periods ended June 30, 2001. The increase
in net income was primarily due to the improvements in net interest income,
which is partially offset by the increase in non-interest expense. The
improvement in net interest income was primarily due to the increase in the
commercial real estate loan and other commercial loan portfolios and the
decreasing cost of deposits during the period. Management expects net interest
income to continue to increase during 2002 due to the continued growth in the
loan portfolio and the continued diversification of the deposit mix with
emphasis on the growth of savings, interest checking and money market accounts.
NET INTEREST INCOME
2002 Compared to 2001. As noted on the charts on the following pages, net
interest income for the three and six month periods ended June 30, 2002, was
$2,520,000 and $4,789,000, respectively, compared to $1,558,000 and $3,165,000
for the same periods ended June 30, 2001, an increase of $962,000 or 62% and
$1,624,000 or 51%, respectively. This increase was caused primarily by an
increase in the volume of interest earning assets and interest bearing
liabilities and the net interest rate spread during the periods. The
Corporation's interest rate spread was 3.11% and 3.19%, respectively, for the
three and six month periods ended June 30, 2002, compared to 2.34% and 2.31% for
the same periods in 2001. The Corporation's net interest margin on earning
assets was 3.68% and 3.76%, respectively, for the three and six month periods
ended June 30, 2002 compared to 3.45% and 3.50% for the same periods in 2001.
The Corporation's increase in interest rate spread and net interest margin was
primarily the result of the decreasing cost of the Bank's deposits as a result
of the Bank's ability to adjust the deposit mix by increasing the balances in
savings and other transaction-based deposit products relative to total deposits.
Additionally, general industry rates have remained low throughout 2002.
Management expects that both the net interest margin on earning assets and the
net interest rate spread will increase during 2002 as the Bank converts funds
currently held in federal funds, interest bearing deposits with banks and
securities, available for sale into loans. Planned deposit growth for the
remainder of 2002 is expected to slow, by design, in comparison to the first six
months of 2002.
13
Average Balances, Interest Rates and Yields. Net interest income is affected by
the difference ("interest rate spread") between rates of interest earned on
interest-earning assets and rates of interest paid on interest-bearing
liabilities and the relative amounts of interest-bearing liabilities and
interest-earning assets. When the total of interest-earning assets approximates
or exceeds the total of interest-bearing liabilities, any positive interest rate
spread will generate net interest income. Financial institutions have
traditionally used interest rate spreads as a measure of net interest income.
Another indication of an institution's net interest income is its "net yield on
interest-earning assets" or "net interest margin," which is net interest income
divided by average interest-earning assets.
The following tables set forth certain information relating to the Corporation's
consolidated average interest-earning assets and interest-bearing liabilities
and reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average daily balance of assets or liabilities, respectively, for
the periods presented. During the periods indicated, non-accruing loans, if any,
are included in the loan category.
Three months ended June 30, Three months ended June 30,
2002 2001
----------------------------------------------------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
---------- --------- --------- ---------- --------- ----------
Assets
Interest-bearing deposits with banks $8,910 $37 1.67% $10,428 $115 4.44%
Federal funds sold 13,292 53 1.60% 20,165 218 4.35%
Securities, available for sale 36,215 329 3.65% 15,508 215 5.58%
Loans 217,306 4,030 7.46% 135,399 2,964 8.80%
---------- --------- --------- ---------- --------- ----------
Total earning assets 275,723 4,449 6.49% 181,500 3,512 7.78%
Other assets 9,313 12,695
---------- ----------
Total assets $285,036 $194,195
========== ==========
Liabilities and stockholders' equity
Interest bearing deposits $209,762 $1,705 3.27% $144,046 $1,946 5.43%
Other borrowings 20,000 224 4.50% 455 8 7.07%
---------- --------- --------- ---------- --------- ----------
Total interest bearing liabilities 229,762 1,929 3.38% 144,501 1,954 5.44%
Non-interest bearing deposits 25,554 20,293
Other liabilities 958 1,212
Stockholders' equity 28,762 28,189
---------- ----------
Total liabilities and stockholders' equity $285,036 $194,195
========== ==========
Net interest income $2,520 $1,558
========= =========
Net interest rate spread 3.11% 2.34%
========= ==========
Net interest margin on earning assets 3.68% 3.45%
========= ==========
14
Three months ended June 30, Three months ended June 30,
2002 2001
----------------------------------------------------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
---------- --------- --------- ---------- --------- ----------
Assets
Interest-bearing deposits with banks $7,931 $58 1.48% $7,664 $174 4.56%
Federal funds sold 14,832 130 1.77% 18,259 438 4.82%
Securities, available for sale 30,303 574 3.83% 23,920 670 5.63%
Loans 204,507 7,680 7.59% 132,758 5,900 8.94%
---------- --------- --------- ---------- --------- ---------
Total earning assets 257,573 8,442 6.63% 182,601 7,182 7.91%
Other assets 10,408 11,008
---------- ----------
Total assets $267,981 $193,609
========== ==========
Liabilities and stockholders' equity
Interest bearing deposits $194,584 $3,204 3.33% $143,634 $4,001 5.60%
Other borrowings 20,000 449 4.54% 459 16 7.01%
---------- --------- --------- ---------- --------- ---------
Total interest bearing liabilities 214,584 3,653 3.44% 144,093 4,017 5.61%
Non-interest bearing deposits 23,809 20,087
Other liabilities 1,078 1,338
Stockholders' equity 28,510 28,091
---------- ----------
Total liabilities and stockholders' equity $267,981 $193,609
========== ==========
Net interest income $4,789 $ 3,165
========= =========
Net interest rate spread 3.19% 2.31%
========= =========
Net interest margin on earning assets 3.76% 3.50%
========= =========
15
Rate/Volume Analysis. The following table analyzes net interest income in terms
of changes in the volume of interest-earning assets and interest-bearing
liabilities and changes in yields and rates. The table reflects the extent to
which changes in the interest income and interest expense are attributable to
changes in volume (changes in volume multiplied by prior year rate) and changes
in rate (changes in rate multiplied by prior year volume). Changes attributable
to the combined impact of volume and rate have been allocated proportionately to
changes due to volume and changes due to rate.
Three Months ended Six Months Ended
June 30, 2002/2001 June 30, 2002/2001
Change in Interest Due to: Change in Interest Due to:
---------------------------------- ---------------------------------
Average Average Net Average Average Net
(In thousands) Balance Rate Change Balance Rate Change
---------- --------- --------- --------- ---------- ---------
Assets
Interest bearing deposits with banks ($6) ($72) ($78) $2 ($118) ($116)
Federal funds sold (27) (138) (165) (30) (278) (308)
Securities, available for sale 189 (75) 114 117 (213) (96)
Loans 1,521 (455) 1,066 2,670 (890) 1,780
---------- --------- --------- --------- ---------- ---------
Total earning assets $1,677 ($740) $937 $2,759 ($1,499) $1,260
========== ========= ========= ========= ========== =========
Liabilities
Interest bearing deposits $538 ($779) ($241) $835 ($1,632) ($797)
Other borrowings 219 (3) 216 439 (6) 433
---------- --------- --------- --------- ---------- ---------
Total interest bearing liabilities $757 ($782) ($25) $1,274 ($1,638) ($364)
========== ========= ========= ========= ========== =========
Net interest income $962 $1,624
========= =========
Net interest rate spread 0.77% 0.88%
========= =========
Net interest margin on earning assets 0.23% 0.26%
========= =========
PROVISION FOR LOAN LOSSES
2002 Compared to 2001. The provision for loan losses was $263,000 and $488,000
for the three and six month period ended June 30, 2002, compared to $125,000 and
$255,000 for the same periods in 2001, an increase of $138,000 or 110% for the
three month period and $233,000 or 91% for the six month period. The provision
for loan losses for the three and six months ended June 30, 2002 is based on
internal analysis of the adequacy of the allowance for loan losses which
considers the size and composition of the loan portfolio as well as other
factors, including types and amounts of non-performing loans, historical and
anticipated loss experience on such types of loans, and current and projected
economic conditions.
16
NON-INTEREST INCOME
2002 Compared to 2001. Non-interest income was $238,000 and $551,000 for the
three and six month periods ended June 30, 2002, compared to $358,000 and
$584,000 for the same periods in 2001, a decrease of $120,000 or 34% for the
three month period and a decrease of $33,000 or 6% for the six month period. The
decrease was primarily due to the decline in the gain on the sale of loans
during the period. This decrease was a result of a decrease in the volume of
loans, held for sale that were originated and sold during the second quarter of
2002.
NON-INTEREST EXPENSE
2002 Compared to 2001. Non-interest expense was $1,699,000 and $3,334,000 for
the three and six month periods ended June 30, 2002, compared to $1,270,000 and
$2,487,000 for the same periods in 2001, an increase of $429,000 or 34% for the
three month period and $847,000 or 34% for the six month period. The largest
component of non-interest expense was salaries and employee benefits which
amounted to $1,096,000 and $2,104,000 for the three and six month periods ended
June 30, 2002, compared to $793,000 and $1,599,000 for the same periods in 2001,
an increase of $303,000 or 38% for the three month period and $505,000 or 32%
for the six month period. The primary factor in the increase in salaries and
benefits expense was the addition of two branch offices during the second half
of 2001, the expansion of the commercial lending department and general staff
increases. As of June 30, 2002, the number of full time equivalent employees was
80 compared to 55 as of June 30, 2001. Salaries and employee benefits will
continue to increase with the opening of a branch office in the fourth quarter
of 2002 along with general staff increases.
Two other components of the increase in non-interest expense were occupancy and
equipment expense and other operating expense. Occupancy and equipment expense
amounted to $225,000 and $443,000 for the three month and six month periods
ended June 30, 2002, compared to $128,000 and $241,000 for the same periods in
2001, an increase of $97,000 or 76% for the three month period and $202,000 or
84% for the six month period. Other operating expense amounted to $128,000 and
$296,000 for the three month period and six month periods ended June 30, 2002,
compared to $120,000 and $213,000 for the same periods in 2001, an increase of
$8,000 or 7% for the three month period and $83,000 or 39% for the six month
period. The primary factor in the increase in occupancy and equipment expense
and other operating expense was the opening of branch offices in Canton
Township, Michigan and Clinton Township, Michigan. The Bank also completed the
construction of an addition to the Bank's main office in Dearborn, Michigan in
December 2001. During 2002, the Bank will open a retail branch on the pad site
along Hall Road in Clinton Township in front of the current offices in the River
Ridge Corporate Office Center Building. Construction of this project commenced
during the second quarter of 2002. Upon completion, the retail branch staff will
move to the pad site while loan, operations and administrative personnel will
remain in the existing building. Additionally, the Bank expects to open a branch
office during the fourth quarter of 2002.
17
INCOME TAX PROVISION
2002 Compared to 2001. Income tax expense was $270,000 and $515,000 for the
three and six month period ended June 30, 2002, compared to $175,000 and
$341,000 for the same periods in 2001, an increase of $95,000 or 54% for the
three month period and $174,000 or 51% for the six month period. The increase
was primarily a result of increased pre-tax income and the effective tax rate
was approximately 34% in all periods..
18
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2002 AND DECEMBER 31, 2001
Assets. Total assets at June 30, 2002 were $289,540,000 compared to $226,865,000
at December 31, 2001, an increase of $62,675,000 or 28%. The increase was
primarily due to increases in loans and securities, available for sale during
the period. The growth in loans and securities, available for sale was funded
with deposit growth.
Federal Funds Sold. Total federal funds sold at June 30, 2002 were $8,779,000
compared to $4,887,000 at December 31, 2001, an increase of $3,892,000 or 80%.
The increase was primarily due to the short term deployment of funds that were
received as a result of an increase in deposits during the period. These funds
are deployed into federal funds sold until they can be utilized to fund loan
volume.
Interest bearing deposits with banks. Total interest bearing deposits with banks
at June 30, 2002 were $2,645,000 compared to $7,387,000 at December 31, 2001, a
decrease of $4,742,000 or 64%. This decrease was due to the deployment of these
funds into loans. This investment was established to provide the Corporation
with an alternate short term investment option. This short term investment is a
variable-rate certificate of deposit with the Federal Home Loan Bank of
Indianapolis that carries a similar rate of return to federal funds sold.
Mortgage Loans Held for Sale. Total mortgage loans held for sale at June 30,
2002 were $406,000 compared to $2,915,000 at December 31, 2001, a decrease of
$2,509,000 or 86%. This decrease was primarily due to a decrease in the
origination of loans held for sale during the first half of 2002 and the Bank's
ability to receive funding more rapidly due to the use of additional
correspondents.
Securities - Available for Sale. Total securities, available for sale, at June
30, 2002 were $41,713,000 compared to $21,652,000 at December 31, 2001, an
increase of $20,061,000 or 93%. The increase was due to the purchase of
securities, available for sale during the period. These securities were
purchased to improve the yield on the Bank's available funds and carry an
average maturity of less than thirty months.
The entire portfolio has a unrealized gain of $220,000. The Corporation does not
hold any securities in the "Held to Maturity" category nor does the Corporation
hold or utilize derivatives.
Please refer to Note B for the amortized cost and estimated market value of
securities, available for sale.
Federal Home Loan Bank Stock. Federal Home Loan Bank stock was valued at
$1,000,000 at June 30, 2002 and December 31, 2001.
19
Loans. Total loans at June 30, 2002 were $226,800,000 compared to $180,892,000
at December 31, 2001, an increase of $45,908,000 or 25%. The increase was
primarily due to the expansion of the commercial lending department during 2001.
This expansion included the addition of two experienced commercial loan officers
at the Bank's branch office in Clinton Township, Michigan and the development of
the surrounding region. This expansion continued in 2002, with the addition of
an experienced commercial loan officer at the main office in Dearborn, Michigan
during the second quarter of 2002. Major categories of loans included in the
loan portfolio are as follows (in thousands):
06/30/02 12/31/01 06/30/01
------------------- -------------- -------------------
Consumer loans $20,363 $18,773 $16,255
Commercial, financial, & other 39,344 28,920 27,754
Commercial real estate construction 21,402 10,463 5,408
Commercial real estate mortgages 113,147 90,200 58,737
Residential real estate mortgages 32,544 32,536 33,149
------------------- -------------- -------------------
226,800 180,892 141,303
Allowance for loan losses (2,313) (1,922) (1,373)
------------------- -------------- -------------------
$224,487 $178,970 $139,930
=================== ============== ===================
The following is a summary of non-performing assets and problems loans (in
thousands):
06/30/02 12/31/01 06/30/01
------------------- -------------- -------------------
Over 90 days past due and still accruing $20 $364 $536
Non-accrual loans 760 427 328
Renegotiated loans --- --- 354
Other real estate owned --- --- ---
------------------- -------------- -------------------
$780 $791 $1,218
=================== ============== ===================
Non-accrual loans at June 30, 2002 were $760,000, of which, $336,000 were well
secured by residential real estate. Non-accrual loans consisted of two
residential mortgage loans in bankruptcy proceedings with balances of $289,000
and $47,000 and two slow paying commercial equipment loans with balances of
$286,000 and $138,000.
20
Allowance for Loan Losses. The allowance for loan losses was $2,313,000 at June
30, 2002 compared to $1,922,000 at December 31, 2001, an increase of $391,000 or
20%. The allowance for loan losses was based upon management's assessment of
relevant factors, including loan growth, types and amounts of non-performing
loans, historical and anticipated loss experience on such types of loans, and
current and projected economic conditions.
The following is an analysis of the allowance for loan losses (in thousands):
Six Months Ended Year Ended Six Months Ended
06/30/02 12/31/01 06/30/01
------------------------ ------------------- -----------------------
Balance, beginning of year $1,922 $1,252 $1,252
Charge-offs:
Consumer loans (21) (43) (43)
Commercial loans (82) (251) (103)
Recoveries:
Consumer loans 3 32 11
Commercial loans 3 12 ---
------------------------ ------------------- -----------------------
Net charge-offs (97) (250) (135)
Additions charged to operations 488 920 255
------------------------ ------------------- -----------------------
Balance, end of period $2,313 $1,922 $1,372
======================== =================== =======================
Allowance to total loans 1.02% 1.06% 0.97%
======================== =================== =======================
Allowance to nonperforming assets 296.54% 242.98% 112.64%
======================== =================== =======================
Net charge-offs to average loans 0.05% 0.17% 0.10%
======================== =================== =======================
Premises and Equipment. Bank premises and equipment at June 30, 2002 was
$4,739,000 compared to $4,746,000 at December 31, 2001, a decrease of $7,000 or
less than 1%.
Accrued Interest Receivable. Accrued interest receivable at June 30, 2002 was
$1,329,000 compared to $1,085,000 at December 31, 2001, an increase of $244,000
or 22%. The increase was primarily due to the increase in the Bank's loan and
investment portfolios.
Other Assets. Other assets at June 30, 2002 were $716,000 compared to $623,000
at December 31, 2001, an increase of $93,000 or 15%. The increase was primarily
due to changes in deferred tax assets.
21
Deposits. Total deposits at June 30, 2002 were $239,527,000 compared to
$177,481,000 at December 31, 2001, an increase of $62,046,000 or 35%. The
following is a summary of the distribution of deposits (in thousands):
06/30/02 12/31/01 06/30/01
------------------------ ------------------- -----------------------
Non-interest bearing:
Demand $28,785 $21,441 $22,045
------------------------ ------------------- -----------------------
Interest bearing:
Checking $12,999 $9,263 $8,545
Money market 18,542 20,545 27,656
Savings 51,844 37,429 26,906
Time, under $100,000 61,082 38,667 40,561
Time, $100,000 and over 66,275 50,136 45,471
------------------------ ------------------- -----------------------
210,742 156,040 149,139
------------------------ ------------------- -----------------------
Total deposits $239,527 $177,481 $171,184
======================== =================== =======================
The increase in deposits was primarily due to normal business development,
marketing, telemarketing, referral programs and growth strategies which included
a grand opening promotion for the Bank's branch office in Clinton Township,
Michigan, which targeted time deposit growth and an annual birthday celebration
and marketing campaign in March 2002. Management also implemented a strategy
during 2001 to change the mix of the deposit portfolio by focusing more heavily
on demand, interest bearing checking, savings and money market, while reducing
its reliance on time deposits. The implementation of this strategy will continue
during the remainder of 2002.
Federal Home Loan Bank Advances. Federal Home Loan Bank advances were
$20,000,000 at June 30, 2002 and December 31, 2001.
Accrued Interest Payable. Accrued interest payable at June 30, 2002 was $604,000
compared to $804,000 at December 31, 2001, a decrease of $200,000 or 25%. The
decrease was primarily due to the decreasing cost of interest bearing deposits
during the period.
Other Liabilities. Other liabilities at June 30, 2002 were $418,000 compared to
$677,000 at December 31, 2001, a decrease of $259,000 or 38%. The decrease was
primarily due to the decrease in expenses payable during the period.
22
CAPITAL
Stockholders' equity at June 30, 2002 was $28,991,000 compared to $27,903,000 as
of December 31, 2001, an increase of $1,088,000 or 4%. In prior years, the
Corporation had announced that it would repurchase up to 406,874 shares of its
outstanding common stock under two stock repurchase programs. Through December
31, 2001, the Corporation was able to repurchase 393,624 shares within
Securities and Exchange Commission guidelines primarily related to the volume of
market activity. Considering that the Corporation's stock closed at $13.800 per
share on June 30, 2002, representing a 118 percent market to book ratio and the
Corporation's plans for continued expansion, the Corporation is not planning to
repurchase shares during 2002. No shares were repurchased during the first six
months of 2002.
The following is a presentation of the Corporation's and Bank's regulatory
capital ratios (in thousands):
Minimum
To Be Well Capitalized
Minimum for Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------- ---------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------- ---------------------- --------------------------
As of June 30, 2002
Total capital
(to risk weighted assets)
Consolidated 31,159 12.5% 19,913 8.0% 24,891 10.0%
Bank 25,564 10.4% 19,578 8.0% 24,473 10.0%
Tier 1 capital
(to risk weighted assets)
Consolidated 28,846 11.6% 9,957 4.0% 14,935 6.0%
Bank 23,251 9.5% 9,789 4.0% 14,684 6.0%
Tier 1 capital
(to average assets)
Consolidated 28,846 10.1% 11,401 4.0% 14,252 5.0%
Bank 23,251 8.3% 11,180 4.0% 13,975 5.0%
As of December 31, 2001
Total capital
(to risk weighted assets)
Consolidated 29,765 14.2% 16,735 8.0% 20,939 10.0%
Bank 20,170 10.1% 16,056 8.0% 20,090 10.0%
Tier 1 capital
(to risk weighted assets)
Consolidated 27,843 13.3% 8,367 4.0% 12,563 6.0%
Bank 18,249 9.1% 8,028 4.0% 12,054 6.0%
Tier 1 capital
(to average assets)
Consolidated 27,843 12.9% 8,654 4.0% 10,817 5.0%
Bank 18,249 8.9% 8,183 4.0% 10,229 5.0%
Based on the respective regulatory capital ratios at June 30, 2002 and December
31, 2001, the Corporation and Bank are considered well capitalized.
23
LIQUIDITY AND ASSET AND LIABILITY MANAGEMENT
Liquidity refers to readily available funds to meet the needs of borrowers and
depositors. Levels of liquidity are closely monitored in conjunction with loan
funding requirements and deposit outflows. Adequate liquidity protects
institutions from raising funds under duress at excessive expense and provides a
necessary cushion for occasional unpredictable aberrations in demand. While
adequate liquidity is imperative, excessive liquidity in lower yielding cash
investments or other easily marketable assets reduces potential interest income.
Thus, an appropriate balance must be maintained to protect the institution and
at the same time, prudently maximize income opportunities. Sources of liquidity
from both assets and liabilities include federal funds sold, securities
available for sale, loan repayments, core deposits and a federal funds purchase
credit facility.
24
PART I - FINANCIAL INFORMATION
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Interest Rate Sensitivity Analysis. The Corporation has sought to manage its
exposure to changes in interest rates by matching the effective maturities or
repricing characteristics of the Corporation's interest-earning assets and
interest-bearing liabilities. The matching of the assets and liabilities may be
analyzed by examining the extent to which the assets and liabilities are
interest rate sensitive and by monitoring the expected effects of interest rate
changes on net interest income.
An asset or liability is interest rate sensitive within a specific time period
if it will mature or reprice within that time period. If the Corporation's
assets mature or reprice more quickly or to a greater extent that its
liabilities, the Corporation's net portfolio value and net interest income would
tend to increase during periods of rising interest rates but decrease during
periods of falling interest rates. If the Corporation's assets mature or reprice
more slowly or to a lesser extent than its liabilities, its net portfolio value
and net interest income would tend to decrease during periods of rising interest
rates but increase during periods of falling interest rates.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity "gap"
is the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceed the amount of interest rate
sensitive assets. During a period of rising interest rates, a negative gap would
be expected to adversely affect net interest income while a positive gap would
be expected to result in an increase in net interest income, while conversely
during a period of declining interest rates, a negative gap would be expected to
result in an increase in net interest income and a positive gap would be
expected to adversely affect net interest income.
25
Different types of assets and liabilities with the same or similar maturities
may react differently to changes in overall market rates or conditions, and thus
changes in interest rates may affect net interest income positively or
negatively even if an institution were perfectly matched in each maturity
category. Additionally, the gap analysis does not consider the many factors as
banking interest rates move. While the interest rate sensitivity gap is a useful
measurement and contributes toward effective asset and liability management, it
is difficult to predict the effect of changing interest rates solely on that
measure, without accounting for alterations in the maturity or repricing
characteristics of the balance sheet that occur during changes in market
interest rates. During periods of rising interest rates, the Corporation's
assets tend to have prepayments that are slower than those in an interest rate
sensitivity gap and would increase the negative gap position. Conversely, during
a period of declining interest rates, the Corporation's assets would tend to
prepay faster than originally expected thus decreasing the negative gap
position. In addition, some of the Corporation's assets, such as adjustable rate
mortgages, have caps on the amount by which their interest rates can change in
any single period, and therefore may not reprice as quickly as liabilities in
the same maturity category.
The following table sets forth the amounts of interest earning assets and
interest bearing liabilities outstanding at June 30, 2002, which are expected to
mature or reprice in each of the time periods shown below.
---------------------------------------------------------------
(In thousands) 1-90 91-365 1-5 Over
Days Days Years 5 Years Total
------------ ------------ ----------- ----------- -----------
Earning assets
Federal funds sold $8,779 $--- $--- $--- $8,779
Interest bearing deposits with banks 2,645 --- --- --- 2,645
Mortgage loans held for sale 406 --- --- --- 406
Securities available for sale 16,789 8,071 14,538 2,315 41,713
Federal Home Loan Bank stock 1,000 --- --- --- 1,000
Total loans (1) 65,395 13,331 133,262 14,052 226,040
------------ ------------ ----------- ----------- -----------
Total earning assets 95,014 21,402 147,800 16,367 280,583
Interest bearing liabilities
Time deposits 24,102 79,328 23,927 --- 127,357
Other interest bearing deposits 83,385 --- --- --- 83,385
Federal Home Loan Bank advances --- --- 10,000 10,000 20,000
------------ ------------ ----------- ----------- -----------
Total interest bearing liabilities 107,487 79,328 33,927 10,000 230,742
Net asset (liability) funding gap (12,473) (57,926) 113,873 6,367 $49,841
------------ ------------ ----------- ----------- ===========
Cumulative net asset (liability) funding gap ($12,473) ($70,399) $43,474 $49,841
============ ============ =========== ===========
(1) Total loans do not include non-accrual loans.
26
DEARBORN BANCORP, INC. AND SUBSIDIARY
FORM 10-Q (continued)
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
The corporation held its regular annual meeting on May 21, 2002. At
this meeting, four directors were re-elected to serve three-year terms
expiring in 2005. The voting results for each nominee were as follows:
Nominee Total For
------- ---------
Wilbur M. Brucker Jr. 2,202,436
Bradley F. Keller 2,203,334
Richard Nordstrom 2,202,436
Ronnie J. Story 2,203,088
ITEM 6. EXHIBITS AND REPORTS IN FORM 8-K.
(a) A Form 8-K Report was not filed during the three months ended June 30,
2002.
27
DEARBORN BANCORP, INC.
FORM 10-Q (continued)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dearborn Bancorp, Inc.
(Registrant)
/s/ John E. Demmer
-------------------------------------
John E. Demmer
Chairman
/s/ Michael J. Ross
-------------------------------------
Michael J. Ross
President and Chief Executive Officer
/s/ Jeffrey L. Karafa
-------------------------------------
Jeffrey L. Karafa
Treasurer and Chief Financial Officer
Date: August 10, 2002
28
DEARBORN BANCORP, INC.
FORM 10-Q (continued)
CERTIFICATION
The undersigned, Michael J. Ross, Chief Executive Officer, and Jeffrey
L. Karafa, Chief Financial Officer, of Dearborn Bancorp, Inc., a Michigan
corporation (the "Company") do hereby certify that the periodic report on Form
10-Q of the Company for the quarterly period ended June 30, 2002 containing
financial statements of the Company fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or
78o(d)) and that information contained in the periodic report fairly presents,
in all material respects, the financial condition and results of operations of
the Company.
IN WITNESS WHEREOF, we have signed this Certification as of the 10th
day of August, 2002.
/S/ Michael J. Ross
------------------------------------------
Michael J. Ross
Chief Executive Officer
/S/ Jeffrey L. Karafa
------------------------------------------
Jeffrey L. Karafa
Chief Financial Officer
29