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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 March 31, 2003.
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 April 30, 2003.
Class Shares Outstanding
----- ------------------
Common Stock 2,629,958
DEARBORN BANCORP, INC.
INDEX
Part I. Financial Information:
Item 1. Financial Statements
Page
----
The following consolidated financial statements of Dearborn
Bancorp, Inc. and its subsidiary included in this report are:
Independent Accountants' Report 3
Consolidated Balance Sheets -- March 31, 2003,
December 31, 2002 and March 31, 2002 4
Consolidated Statements of Income - For the Three
Months Ended March 31, 2003 and 2002 5
Consolidated Statements of Comprehensive Income - For
the Three Months Ended March 31, 2003 and 2002 6
Consolidated Statements of Cash Flows - For the
Three Months Ended March 31, 2003 and 2002 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 12-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23-24
Item 4. Controls and Procedures 25
Part II. Other Information:
Pursuant to SEC rules and regulations, the following item(s) are
included with the Form 10-Q Report:
Item 6. Exhibits and Reports on Form 8-K 26
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 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
SIGNATURES 27
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
March 31, 2003 and 2002, and the related consolidated statements of income,
comprehensive income and cash flows for the three month periods then ended.
These financial statements are the responsibility of the Corporation'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 auditing standards generally accepted in the United States of America, 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 accounting principles generally accepted in the United States of
America.
/s/ Crowe Chizek and Company LLC
Grand Rapids, Michigan
April 22, 2003
3
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars, in thousands)
03/31/03 12/31/02 03/31/02
-------- -------- --------
ASSETS
Cash and cash equivalents
Cash and due from banks $ 7,510 $ 5,903 $ 6,620
Federal funds sold 12,385 8,572 19,138
Interest bearing deposits with banks 33,983 4,975 14,478
--------- --------- ---------
Total cash and cash equivalents 53,878 19,450 40,236
Mortgage loans held for sale 8,633 9,852 307
Securities, available for sale 28,866 22,216 30,620
Federal Home Loan Bank stock 1,033 1,033 1,000
Loans
Loans 288,321 267,522 208,851
Allowance for loan losses (3,109) (2,875) (2,131)
--------- --------- ---------
Net loans 285,212 264,647 206,720
Premises and equipment, net 5,596 5,276 4,777
Accrued interest receivable 1,279 1,260 1,186
Other assets 1,558 1,366 779
--------- --------- ---------
Total assets $ 386,055 $ 325,100 $ 285,625
--------- --------- ---------
LIABILITIES
Deposits
Non-interest bearing deposits $ 29,023 $ 32,457 $ 24,976
Interest bearing deposits 293,039 229,629 211,403
--------- --------- ---------
Total deposits 322,062 262,086 236,379
Other liabilities
Federal Home Loan Bank advances 20,660 20,660 20,000
Trust preferred securities 10,000 10,000 ---
Accrued interest payable 874 609 574
Other liabilities 1,119 1,054 379
--------- --------- ---------
Total liabilities 354,715 294,409 257,332
STOCKHOLDERS' EQUITY
Common stock - 5,000,000 shares authorized,
2,627,158 shares at 03/31/03, 2,614,587 shares at
12/31/02; and 2,596,386 shares at 03/31/02 30,690 30,611 27,675
Retained earnings 580 --- 645
Accumulated other comprehensive income (loss) 70 80 (27)
--------- --------- ---------
Total stockholders' equity 31,340 30,691 28,293
--------- --------- ---------
Total liabilities and stockholders' equity $ 386,055 $ 325,100 $ 285,625
========= ========= =========
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)
03/31/03 03/31/02
---------- ----------
Interest income
Interest on loans, including fees $ 5,000 $ 3,650
Interest on securities, available for sale 199 245
Interest on deposits with banks 78 21
Interest on federal funds sold 40 77
---------- ----------
Total interest income 5,317 3,993
Interest expense
Interest on deposits 1,953 1,499
Interest on other borrowings 352 225
---------- ----------
Total interest expense 2,305 1,724
---------- ----------
Net interest income 3,012 2,269
Provision for loan losses 228 225
---------- ----------
Net interest income after provision for loan losses 2,784 2,044
---------- ----------
Non-interest income
Service charges on deposit accounts 103 76
Fees for other services to customers 9 8
Gain on the sale of loans 626 222
Other income 13 7
---------- ----------
Total non-interest income 751 313
Non-interest expenses
Salaries and employee benefits 1,777 1,008
Occupancy and equipment expense 322 218
Advertising and marketing 82 62
Stationery and supplies 101 64
Professional services 98 53
Data processing 64 62
Other operating expenses 213 168
---------- ----------
Total non-interest expenses 2,657 1,635
---------- ----------
Income before income tax provision 878 722
Income tax provision 298 245
---------- ----------
Net income $ 580 $ 477
========== ==========
Per share data:
Net income - basic $ 0.22 $ 0.18
Net income - diluted $ 0.20 $ 0.18
Weighted average number of shares outstanding - basic 2,619,399 2,596,386
Weighted average number of shares outstanding - diluted 2,829,792 2,696,088
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)
03/31/03 03/31/02
-------- --------
Net income $580 $477
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during period (15) (132)
Less: reclassification adjustment for gains included
in net income --- ---
Tax effects 5 45
-------- --------
Other comprehensive loss (10) (87)
-------- --------
Comprehensive income $570 $390
======== ========
6
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
3/31/03 3/31/02
-------- --------
Cash flows from operating activities
Interest and fees received $ 5,298 $ 3,892
Interest paid (2,040) (2,499)
Taxes paid (100) (278)
Proceeds from sale of mortgages held for sale 43,763 11,138
Origination of mortgages held for sale (41,918) (8,308)
Cash paid to suppliers and employees (2,732) (1,258)
-------- --------
Net cash provided by operating activities 2,271 2,687
Cash flows from investing activities
Proceeds from maturities of securities available for sale 4,000 1,351
Proceeds from repayments of securities available for sale 232 126
Purchases of securities available for sale (10,913) (10,598)
Increase in loans, net of payments received (20,793) (27,975)
Purchases of property and equipment (424) (127)
-------- --------
Net cash used in investing activities (27,898) (37,223)
Cash flows from financing activities
Net increase (decrease) in non-interest bearing deposits (3,434) 3,535
Net increase in interest bearing deposits 63,410 55,363
Proceeds from stock option exercise 79 ---
-------- --------
Net cash provided by financing activities 60,055 58,898
Increase in cash and cash equivalents 34,428 24,362
Cash and cash equivalents at the beginning of the period 19,450 15,874
-------- --------
Cash and cash equivalents at the end of the period $ 53,878 $ 40,236
-------- --------
Reconciliation of net income to net cash provided by
operating activities
Net income $ 580 $ 477
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Provision for loan losses 228 225
Depreciation and amortization expense 104 96
Accretion of discount on securities, available
for sale (2) (2)
Amortization of premium on securities, available
for sale 18 23
Decrease in mortgages held for sale 1,219 2,608
Increase in interest receivable (19) (101)
Increase (decrease) in interest payable 265 (230)
Increase in other assets (187) (111)
Increase (decrease) in other liabilities 65 (298)
-------- --------
Net cash provided by operating activities $ 2,271 $ 2,687
======== ========
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 March
31, 2003 and 2002, and December 31, 2002 and for the three month period
ended March 31, 2003 and 2002 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 quarter are not necessarily
indicative of results of operations for the entire year.
The consolidated financial statements as of March 31, 2003 and 2002,
and for the three months ended March 31, 2003 and 2002 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 2002 Annual Report to Stockholders on
Form 10-K.
8
A. Accounting and Reporting Policies (continued)
Employee compensation expense under stock option plans is reported
using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise plan
equal to or greater than the market price of the underlying common
stock at date of grant. The following table illustrates the effect on
net income and earnings per share if expense was measured using the
fair value recognition provisions of FASB Statement No. 123, Accounting
for Stock-based Compensation (in thousands, except share and per share
data).
For the Three Months Ended March 31,
2003 2002
---------- ----------
Net income
As reported $580 $477
Less: stock-based compensation expense
determined under fair value based method 345 263
----- -----
Pro forma 235 214
Basic income per share
As reported $0.22 $0.18
Pro forma 0.09 0.08
Diluted income per share
As reported $0.20 $0.18
Pro forma 0.08 0.08
For the Three Months Ended March 31,
2003 2002
---------- ----------
Risk-free interest rate 3.55% 4.78%
Expected option life 7 years 8 years
Dividend yield 0.00% 0.00%
Expected volatility of stock price 25.63% 26.07%
9
B. Securities Available For Sale
The amortized cost and estimated market value of securities available
for sale are as follows (in thousands):
March 31, 2003
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ----------- --------- ---------
US Treasury securities $2,043 $6 $--- $2,049
US Government Agency securities 3,500 --- --- 3,500
Mortgage backed securities 1,972 72 --- 2,044
Corporate debt securities 14,122 35 --- 14,157
Municipal securities 3,123 1 (8) 3,116
FHLMC preferred stock 4,000 --- --- 4,000
--------- ----------- --------- ---------
Totals $28,760 $114 ($8) $28,866
========= =========== ========= =========
December 31, 2002
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ----------- --------- ---------
US Treasury securities $ 2,005 $ 2 $--- $ 2,007
Mortgage backed securities 2,202 90 --- 2,292
Corporate debt securities 11,388 39 (10) 11,417
Municipal securities 2,500 --- --- 2,500
FHLMC preferred stock 4,000 --- --- 4,000
--------- ----------- --------- ---------
Totals $22,095 $131 $(10) $22,216
========= =========== ========= =========
The amortized cost and estimated market value of securities available
for sale at March 31, 2003 by contractual maturity are shown below (in
thousands):
Estimated
Amortized Market
Cost Value
--------- ---------
Due in one year through five years $12,673 $12,707
Due in over ten years 10,115 10,115
Mortgage backed securities 1,972 2,044
FHLMC preferred stock 4,000 4,000
--------- ---------
Totals $28,760 $28,866
========= =========
10
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 607,754 shares.
Exercise price is the market price at date of grant. The maximum option
term is ten years, and options vest fully after six months from the
date of grant. If an option expires or terminates without having been
exercised, such option becomes available for future grant under the
Plan.
A summary of the option activity is as follows for the three months
ended March 31, 2003 is as follows:
Weighted
Weighted Average Fair
Available Average Value of
For Options Exercise Options
Grant Outstanding Price Granted
----- ----------- ----- -------
Outstanding at January 1, 2003 103,576 461,662 $ 8.95
Granted (103,576) 103,576 18.40 6.65
Exercised --- (12,571) 7.22
--------- ----------- ------
Outstanding at March 31, 2003 --- 552,667 $10.76
For the options outstanding at March 31, 2003, the range of exercise
prices was $5.60 to $18.40 per share with a weighted-average remaining
contractual term of 7.7 years. At March 31, 2003, 428,341 options were
exercisable at weighted average exercise price of $8.76 per share.
Stock options for 103,576 shares of common stock were not considered in
computing diluted earnings per share for the quarter ended March 31,
2003 because they were antidilutive. There were no antidilutive shares
for the quarter ended March 31, 2002.
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 in Canton Township, Michigan and Clinton Township, Michigan,
respectively. Additionally, Community Bank Mortgage, Inc., a mortgage company,
was formed and began operations in 2001.
During 2002, the Bank opened its sixth branch office in Southgate, Michigan. The
Bank also moved the Clinton Township retail branch operations to 19100 Hall Road
during 2002. The branch office is adjacent to the office at 45000 River Ridge,
which will continue to serve as a regional lending center. The Bank formed
Community Bank Audit Services, Inc., a subsidiary that offers internal audit and
compliance services during 2002. During the first quarter of 2003, the Bank
signed an agreement to lease 2,037 square feet in a commercial office building
in Auburn Hills, Michigan, which will be the location of our second regional
lending center.
RESULTS OF OPERATIONS
The Corporation reported net income of $580,000 for the three month period ended
March 31, 2003, compared to net income of $477,000 for the three month period
ended March 31, 2002. The increase in net income was primarily due to the
improvements in net interest income and the increase in gain on the sale of
loans. 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 2003 due to planned deployment of funds
currently invested in federal funds sold into loans and the repricing of savings
and time deposits. The gain on sale of loans, which is based on the level of
residential real estate mortgage originations are expected to continue at
current levels.
NET INTEREST INCOME
2003 Compared to 2002. As noted on the two charts on the following pages, net
interest income for the three month period ended March 31, 2003, was $3,012,000
compared to $2,269,000 for the same period ended March 31, 2002, an increase of
$743,000 or 33%. This increase was caused primarily by an increase in the volume
of interest earning assets and interest bearing liabilities. The Corporation's
interest rate spread decreased to 3.08% in 2003 from 3.23% in 2002. During the
same period, the Corporation's net interest margin decreased to 3.52% in 2003
from 3.83% during the same period in 2002. The Corporation's decrease in
interest rate spread and net interest margin was primarily the result the
relatively large amount of the Bank's funds that are temporarily invested in
interest bearing deposits with banks and federal funds sold. As these funds are
deployed into loans, the Bank's interest rate spread and net interest rate
margin are expected to improve. Management expects that both the net interest
margin on earning assets and the net interest rate spread will increase during
2003 as the Bank converts funds currently held in federal funds and interest
bearing deposits with banks into loans and the cost of deposits continue to
decrease. Planned deposit growth for the remainder of 2003 is expected to slow
considerably in comparison to the first quarter of 2003.
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 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 loan category.
Three months ended Three months ended
March 31, 2003 March 31, 2002
----------------------------- -----------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
-------- ------ ------ -------- -------- ------
Assets
Interest bearing deposits with banks $ 27,021 $ 78 1.17% $ 6,941 $21 1.23%
Federal funds sold 13,855 40 1.17% 16,389 77 1.91%
Securities, available for sale 25,173 199 3.21% 25,324 245 3.92%
Loans 280,628 5,000 7.23% 191,566 3,650 7.73%
-------- ------ ------ -------- ------ ------
Sub-total earning assets 346,677 5,317 6.22% 240,220 3,993 6.74%
Other assets 19,907 10,415
-------- --------
Total assets $366,584 $250,635
======== ========
Liabilities and stockholders' equity
Interest bearing deposits $266,687 $1,953 2.97% $179,237 $1,499 3.39%
Other borrowings 30,660 352 4.66% 20,000 225 4.56%
-------- ------ ------ -------- ------ ------
Sub-total interest bearing liabilities 297,347 2,305 3.14% 199,237 1,724 3.51%
Non-interest bearing deposits 36,639 21,972
Other liabilities 1,476 1,200
Stockholders' equity 31,122 28,256
-------- --------
Total liabilities and stockholders' equity $366,584 $250,635
======== ========
Net interest income $3,012 $2,269
====== ======
Net interest rate spread 3.08% 3.23%
==== ====
Net interest margin on earning assets 3.52% 3.83%
==== ====
14
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 March 31, 2003/2002
Change in Interest Due to:
--------------------------------------
Average Average Net
(In thousands) Balance Rate Change
------- -------- ------
Assets
Interest bearing deposits with banks $ 58 $ (1) $ 57
Federal funds sold (7) (30) (37)
Securities, available for sale (1) (45) (46)
Loans 1,587 (237) 1,350
-------- -------- ------
Total earning assets $1,637 $(313) $1,324
======== ======== ======
Liabilities
Interest bearing deposits $ 640 $(186) $ 454
Other borrowings 122 5 127
-------- -------- ------
Total interest bearing liabilities $ 762 $(181) $ 581
======== ======== ======
Net interest income $ 743
======
Net interest rate spread (0.15)%
======
Net interest margin on earning assets (0.31)%
======
PROVISION FOR LOAN LOSSES
2003 Compared to 2002. The provision for loan losses was $228,000 for the three
month period ended March 31, 2003, compared to $225,000 for the same period in
2002, an increase of $3,000 or 1% for the three month period. The provision for
loan losses for the three month period ended March 31, 2003 is based on the
internal analysis of the adequacy of the allowance for loan losses. The
provision for loan losses was based upon management's assessment of relevant
factors, including types and amounts of non-performing loans, historical and
anticipated loss experience on such types of loans, and current and projected
economic conditions.
15
NON-INTEREST INCOME
2003 Compared to 2002. Non-interest income was $751,000 for the three month
period ended March 31, 2003, compared to $313,000 for the same period in 2002,
an increase of $438,000 or 140%. The increase was primarily due to the increase
in the gain on the sale of loans during the period. The volume of mortgage loans
sold increased during the period primarily due to the addition of five mortgage
loan originators during 2002. Management expects the gain on sale of loans to
continue at the same level during the remainder of 2003.
NON-INTEREST EXPENSE
2003 Compared to 2002. Non-interest expense was $2,657,000 for the three month
period ended March 31, 2003, compared to $1,635,000 for the same period in 2002,
an increase of $1,022,000 or 63%. The largest component of non-interest expense
was salaries and employee benefits which amounted to $1,777,000 for the three
month period ended March 31, 2003, compared to $1,008,000 for the same period in
2002, an increase of $769,000 or 76%. The primary factor in the increase in
salaries and benefits expense was the addition of two branch offices during 2002
and the expansion of the commercial lending and residential lending departments.
As of March 31, 2003, the number of full time equivalent employees was 106
compared to 68 as of March 31, 2002. Salaries and employee benefits will
continue to increase with the addition of a regional lending center in Auburn
Hills and general staff increases.
The second largest component of the increase in non-interest expense was
occupancy and equipment expense. Occupancy and equipment expense amounted to
$322,000 for the three month period ended March 31, 2003, compared to $218,000
for the same period in 2002, an increase of $104,000 or 48%. The primary factor
in the increase in occupancy and equipment expense was the opening of branch
offices in Clinton Township, Michigan and Southgate, Michigan. During 2003, the
Bank will open a regional lending center in Auburn Hills, Michigan.
INCOME TAX PROVISION
2003 Compared to 2002. The income tax expense was $298,000 for the three month
period ended March 31, 2003, compared to $245,000 for the same period in 2002,
an increase of $53,000 or 22%. The increase was primarily a result of increased
pre-tax income.
16
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2003 AND DECEMBER 31, 2002
Assets. Total assets at March 31, 2003 were $386,055,000 compared to
$325,100,000 at December 31, 2002, an increase of $60,955,000 or 19%. The
increase was primarily due to increases in cash and cash equivalents during the
period.
Federal Funds Sold. Total federal funds sold at March 31, 2003 were $12,385,000
compared to $8,572,000 at December 31, 2002, an increase of $3,813,000 or 44%.
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 March 31, 2003 were $33,983,000 compared to $4,975,000 at December 31, 2002,
an increase of $29,008,000 or 583%. 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 interest bearing
deposits with banks until they can be utilized to fund loan volume. 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 March 31,
2003 were $8,633,000 compared to $9,852,000 at December 31, 2002, a decrease of
$1,219,000 or 12%. This decrease was a result of a change in the level of
residential real estate mortgage loans waiting to be purchased by mortgage
correspondents.
Securities - Available for Sale. Total securities, available for sale, at March
31, 2003 were $28,866,000 compared to $22,216,000 at December 31, 2002, an
increase of $6,650,000 or 30%. The increase was due to the purchase of
securities, available for sale during the period. These securities were
purchased in order to increase the Bank's earning asset yield.
The entire portfolio has a unrealized gain of $106,000 at March 31, 2003. 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 of the Notes to Consolidated Financial Statements 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
$1,033,000 at March 31, 2003 and December 31, 2002.
17
Loans. Total loans at March 31, 2003 were $288,321,000 compared to $267,522,000
at December 31, 2002, an increase of $20,799,000 or 8%. The increase was
primarily due to the continued expansion of the commercial lending department
during 2003. This expansion included the addition of five experienced loan
officers during the last twelve months. Three of these loan officers will
continue to focus their efforts on developing commercial lending relationships
in Oakland County and relocate to our regional lending center in Auburn Hills,
Michigan during the second quarter of 2003. Major categories of loans included
in the loan portfolio are as follows (in thousands):
03/31/03 12/31/02 03/31/02
-------- -------- --------
Consumer loans $ 21,408 $ 22,170 $ 18,147
Commercial, financial, & other 54,967 46,187 35,199
Commercial real estate construction 33,458 30,083 16,756
Commercial real estate mortgages 146,745 139,243 108,053
Residential real estate mortgages 31,743 29,839 30,696
-------- -------- --------
288,321 267,522 208,851
Allowance for loan losses (3,109) (2,875) (2,131)
-------- -------- --------
$285,212 $264,647 $206,720
======== ======== ========
The following is a summary of non-performing assets and problems loans (in
thousands):
03/31/03 12/31/02 03/31/02
-------- -------- --------
Over 90 days past due and still accruing $ 41 $ 32 $ 48
Non-accrual loans 2,634 2,641 854
-------- -------- --------
$2,675 $2,673 $902
======== ======== ========
Non-accrual loans at March 31, 2003 were $2,634,000, of which, $1,903,000 was
related to one commercial loan relationship that is well secured. The remaining
non-accrual loans consisted of one residential loan in bankruptcy proceedings
with a balance of $287,000 and three slow paying commercial loans with balances
of $270,000, $176,000 and $54,000.
Allowance for Loan Losses. The allowance for loan losses was $3,109,000 at March
31, 2003 compared to $2,875,000 at December 31, 2002, an increase of $234,000 or
8%. The increase was primarily due to growth in the loan portfolio during the
three months ended March 31, 2003. 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.
18
The following is an analysis of the allowance for loan losses (in thousands):
Quarter Ended Year Ended Quarter Ended
03/31/03 12/31/02 03/31/02
------------- ---------- -------------
Balance, beginning of year $ 2,875 $1,922 $ 1,922
Charge-offs:
Consumer loans (5) (32) (19)
Commercial loans --- (141) ---
Recoveries:
Consumer loans 2 9 1
Commercial loans 9 65 2
------------- ---------- -------------
Net (charge-offs)/recoveries 6 (99) (16)
Additions charged to operations 228 1,052 225
------------- ---------- -------------
Balance, end of period $3,109 $2,875 $ 2,131
============= ========== =============
Allowance to total loans 1.08% 1.07% 1.02%
============= ========== =============
Allowance to nonperforming assets 116.22% 107.56% 236.25%
============= ========== =============
Net charge-offs to average loans 0.00% 0.17% 0.01%
============= ========== =============
Premises and Equipment. Bank premises and equipment at March 31, 2003 was
$5,596,000 compared to $5,276,000 at December 31, 2002, an increase of $320,000
or 6%. The increase in premises and equipment was primarily due to the cost of
the renovation of the Bank's branch office in Southgate, Michigan.
Accrued Interest Receivable. Accrued interest receivable at March 31, 2003 was
$1,279,000 compared to $1,260,000 at December 31, 2002, an increase of $19,000
or 2%. The increase was primarily due to the increase in the Bank's loan
portfolio.
Other Assets. Other assets at March 31, 2003 were $1,558,000 compared to
$1,366,000 at December 31, 2002, an increase of $192,000 or 14%. The increase
was primarily due to changes in deferred tax assets.
19
Deposits. Total deposits at March 31, 2003 were $322,062,000 compared to
$262,086,000 at December 31, 2002, an increase of $59,976,000 or 23%. The
following is a summary of the distribution of deposits (in thousands):
03/31/03 12/31/02 03/31/02
-------- -------- --------
Non-interest bearing:
Demand $ 29,023 $ 32,457 $ 24,976
-------- -------- --------
Interest bearing:
Checking $ 24,310 $ 25,083 $ 15,470
Money market 12,417 13,490 15,135
Savings 82,774 63,677 50,292
Time, under $100,000 85,140 61,331 61,362
Time, $100,000 and over 88,398 66,048 69,144
-------- -------- --------
293,039 229,629 211,403
-------- -------- --------
Total deposits $322,062 $262,086 $236,379
======== ======== ========
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 retail branch office in Clinton
Township, Michigan during February 2003, which targeted time deposit growth and
an annual birthday celebration and marketing campaign in March 2003. Management
continues to implement a strategy during 2003 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. Management
expects deposits to grow at a more moderate rate during the remainder of 2003.
Federal Home Loan Bank Advances. Federal Home Loan Bank advances were
$20,660,000 at March 31, 2003 and December 31, 2002.
Trust Preferred Securities. Trust preferred securities were $10,000,000 at March
31, 2003 and December 31, 2002. The Corporation issued $10,000,000 of floating
rate obligated mandatory redeemable securities through Dearborn Bancorp Trust I,
a special purpose entity as part of a pooled offering on December 19, 2002. The
interest rate was the three month LIBOR plus 3.35% and was 4.76% at March 31,
2003. The securities have a term of thirty years. The Corporation may redeem the
securities after five years, with regulatory approval, at face value. They are
presented in the liability section of the balance sheet, but are included as
Tier 1 capital for regulatory capital purposes. Debt issue costs of $300,000
have been capitalized and are being amortized over the term of the securities.
Unamortized debt issuance costs were $297,000 at March 31, 2003.
Accrued Interest Payable. Accrued interest payable at March 31, 2003 was
$874,000 compared to $609,000 at December 31, 2001, an increase of $265,000 or
44%. The increase was primarily due to the increasing amount of interest bearing
deposits during the period.
20
Other Liabilities. Other liabilities at March 31, 2003 were $1,119,000 compared
to $1,054,000 at December 31, 2002, an increase of $65,000 or 6%. The increase
was primarily due to the increase in expenses payable during the period.
CAPITAL
Stockholders' equity at March 31, 2003 was $31,340,000 compared to $30,691,000
as of December 31, 2002, an increase of $649,000 or 2%.
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 March 31, 2003
Total capital
(to risk weighted assets)
Consolidated 44,379 14.0% 25,430 8.0% 31,788 10.0%
Bank 33,235 10.8% 24,704 8.0% 30,880 10.0%
Tier 1 capital
(to risk weighted assets)
Consolidated 41,270 13.0% 12,715 4.0% 19,073 6.0%
Bank 30,126 9.8% 12,352 4.0% 18,528 6.0%
Tier 1 capital
(to average assets)
Consolidated 41,270 11.3% 14,663 4.0% 18,329 5.0%
Bank 30,126 8.5% 14,123 4.0% 17,654 5.0%
As of December 31, 2002
Total capital
(to risk weighted assets)
Consolidated 43,486 15.1% 23,075 8.0% 28,844 10.0%
Bank 29,819 10.7% 22,249 8.0% 27,811 10.0%
Tier 1 capital
(to risk weighted assets)
Consolidated 40,611 14.1% 11,538 4.0% 17,306 6.0%
Bank 26,944 9.7% 11,124 4.0% 16,687 6.0%
Tier 1 capital
(to average assets)
Consolidated 40,611 13.2% 12,318 4.0% 15,398 5.0%
Bank 26,944 8.9% 12,066 4.0% 15,082 5.0%
Based on the respective regulatory capital ratios at March 31, 2003 and December
31, 2002, the Corporation and Bank are considered well capitalized.
21
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.
22
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.
23
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 March 31, 2003, 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 $ 12,385 $ --- $ --- $ --- $ 12,385
Interest bearing deposits with Banks 33,983 --- --- --- 33,983
Mortgage loans held for sale 8,633 --- --- --- 8,633
Securities available for sale 16,415 4,084 4,384 3,983 28,866
Federal Home Loan Bank stock 1,033 --- --- --- 1,033
Total loans, net of non-accrual 101,542 20,707 154,162 9,276 285,687
-------- -------- ------- ------- -------
Total earning assets 173,991 24,791 158,546 13,259 370,587
Interest bearing liabilities
Total interest bearing deposits 190,139 55,072 47,828 --- 293,039
Federal Home Loan Bank advances --- --- 15,660 5,000 20,660
Trust preferred securities 10,000 --- --- --- 10,000
-------- -------- ------- ------- -------
Total interest bearing liabilities 200,139 55,072 63,488 5,000 323,699
-------- -------- ------- ------- -------
Net asset (liability) funding gap (26,148) (30,281) 95,058 8,259 $46,888
-------- -------- ------- ------- -------
Cumulative net asset (liability) funding gap $(26,148) $(56,429) $38,629 $46,888
======== ======== ======= =======
24
DEARBORN BANCORP, INC. AND SUBSIDIARY
FORM 10-Q (continued)
Item 4. Controls and Procedures
As of March 31, 2003, an evaluation was performed under the supervision
of and with the participation of the registrant's management, including the
President and Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of the registrant's disclosure
controls and procedures. Based on that evaluation, the registrant's management,
including the President and Chief Executive Officer and the Chief Financial
Officer, concluded that the registrant's disclosure controls and procedures were
effective as of March 31, 2003. There have been no significant changes in the
registrant's internal controls or in other factors that could significantly
affect internal controls subsequent to March 31, 2003.
25
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS IN FORM 8-K.
(a) Exhibits
Exhibit 99.1 CEO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99.2 CFO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) A Form 8-K Report was not filed during the three months ended March 31,
2003.
26
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: May 10, 2003
27
DEARBORN BANCORP, INC.
FORM 10-Q (continued)
CERTIFICATION
I, Michael J. Ross, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dearborn Bancorp,
Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 10, 2003
/s/ Michael J. Ross
--------------------------------------
Michael J. Ross
President and Chief Executive Officer
Dearborn Bancorp, Inc.
28
DEARBORN BANCORP, INC.
FORM 10-Q (continued)
CERTIFICATION
I, Jeffrey L. Karafa, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dearborn Bancorp,
Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 10, 2003
/s/ Jeffrey L. Karafa
--------------------------------------
Jeffrey L. Karafa
Treasurer and Chief Financial Officer,
Dearborn Bancorp, Inc.
29
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002